Final Thoughts

Final Thoughts

Written by Michael Cowden

Price dynamics in the steel market are starting to resemble an inverted yield curve, and market participants should treat the situation with appropriate caution.

Plate mills and tube producers have announced significant price increases: $75 for tubular products ($3.75 per cwt), $80 per ton for plate and as much as $240 per ton for quenched and tempered (Q&T) material.


The reasons are understandable and valid. Plate typically commands a premium to sheet. It has not since last year, when steel prices in general began their sharp rise. And some plate mills have for months been trying to narrow that spread.

While hot-rolled coil prices have fallen recently they are still higher than they were in August. Welded tubulars such as hollow structural sections use HRC as their primary input – and so tube mills need to recoup those higher costs.

And the price hikes announced by domestic mills will probably continue to drive plate and tubular prices higher, at least in the short-term. (Note: SMU does not officially track pipe and tube prices.)

So back to yield curves. An inverted yield curve occurs when short-term debt has a higher yield than long-term debt. That’s the opposite of how things should be. Because more risk is associated with long-term debt, and so lenders and investors typically get a premium for accepting that higher risk.

When the curves invert, it can spell trouble. Yield curves inverted in January 2020 as the COVID-19 outbreak hammered China several months ahead of the virus crisis hitting the U.S. They also inverted ahead of the 2008-09 financial crisis.

So what’s the steel market equivalent of that? Well, I would suggest that higher prices for plate and tubular products among increasingly pronounced declines in sheet products might be one.

And, looking specifically at sheet and plate, there’s a host of indicators besides prices suggesting that we’re over the peak and going down the other side after an extraordinary year. Lead times continue to shorten, prices for prime scrap could move lower in October, import prices remain sharply lower than domestic prices – and futures prices are lower still.

And let’s keep in mind that this is not happening in a vacuum. We’ve already seen a correction in lumber prices. And now we’re seeing a similar scenario in seaborne iron ore prices, which have fallen from approximately $200 per metric tonne over the summer to $100 per metric tonne more recently.

U.S. mills of course source ore and blast furnace pellets from their own mines. So what happens in the seaborne market doesn’t necessarily have an immediate impact on prices in North America. But international ore prices are baked into some contracts here – and so they will impact the U.S. market on a lag.

Here’s a more direct comparison: The CME Group’s September hot-rolled coil futures contract closed at $1,929 per ton on Tuesday – roughly in line with SMU’s updated spot price of $1,920 per ton.

But CME HRC futures are sharply lower for the balance of the year. The October contract closed at $1,882 per ton on Tuesday – or 2% below current spot prices. November was at $1,730 per ton (10% lower), December at $1,540 per ton (20% lower), and January at $1,432 per ton (25% lower).

That trend could no doubt change. If we’ve learned anything over the last two years, it’s that events don’t always goes as expected – in fact they often go way off the rails from what was planned. I’m assuming Section 232 tariffs of 25% will be eased or removed from the EU, for example. But global politics can change on a dime.

I’m not in the business of predicting Black Swan events like COVID-19. And I don’t want to say that a sharp correction in steel prices is anywhere near as severe as the disruption cause by the pandemic.

In fact, I think it’s fair to say that the market will find solid footing as supply and demand come into better balance. And things might be almost back to normal this time next year with new capacity competing successfully with imports – something that could mean increased volumes for domestic mills. But for that to happen, U.S. prices will have to find some balance with those in the rest of the world. And that means the spot market could be a volatile place in the meantime. (Pro tip: It’s a good time to be on an index-based contract in times like these.)

By Michael Cowden,

Michael Cowden

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