Final Thoughts

But that window of opportunity is rapidly closing, if not already shut. If domestic steel prices correct in the next few months, as many predict, the price advantage of imports could erode and tip the risk-reward balance.

“Import makes sense for a short window, maybe 90-120 days, but domestics will react eventually,” said one respondent to SMU’s questionnaire this week. “By the time import arrives, domestic prices will have fallen proportionately,” noted another. “There was a small window, but with futures dropping and January shipments not landing until March, it’s no longer worth the risk,” observed a third executive.

Another SMU source described the current market as “bifurcated” between those seeking contract-guaranteed service and tons next year and those willing to survive on spot buys and imports. That condition is only temporary, however, as the market normalizes over the next three months and the gap between foreign and domestic narrows, he said. “We are in a transition period. Inventory rebalancing in October/November will bring about an adjustment to the premium the U.S. carries. Look for pricing to realign – still at a high number relative to history, but not the exaggerated number we see now,” he predicted.

Competing Against Governments

Any dollar invested in decarbonization anywhere in the world is a step in the right direction in the fight against climate change, right? It’s not that simple, say the CEOs of the major mills in the U.S. Consider where that dollar comes from.

Speaking during a virtual roundtable earlier today with members of the Congressional Steel Caucus and labor leaders, mill execs cried foul over the big subsidies that other governments – including those in the friendly nations of the EU and Canada – have given their steel companies to help them decarbonize. Meanwhile, mills in the U.S. are spending billions of their own money to upgrade older facilities and add new, low-emitting EAF mills to their portfolios.

“We shouldn’t have to compete against other governments,” the CEOs said, appealing to the congressional leaders on the call to make sure U.S. trade representatives understand this inequity.

Current trade talks between the U.S. and EU are widely expected to result in the repeal or modification of the Section 232 tariffs on Europe. Naturally, U.S. steelmakers are strongly opposed. The tariffs have given the domestic industry the breathing room it needed to reinvest, they maintain; to repeal them prematurely could open the gates to a flood of unfair imports. As one stated on the call: “If we do away with Section 232, we will need something just as strong, because the problem of global overcapacity is not going away.”

Chips Take a Chunk Out of Auto Steel

Automakers likely won’t be able to get all the semiconductor chips they need for full production until sometime in 2023, promising another year of disruptions and idlings at assembly plants across North America. And another year of lost sales for automotive steel suppliers.

How much business has steel lost to the microchip shortage so far? Ward’s Intelligence estimates automakers in North America will produce about two million fewer vehicles than expected this year – 1.7 million due to the chip shortfall and the rest to other supply chain issues such as COVID shutdowns and shipping delays. Doing a rough calculation based on an average of one ton of steel per vehicle, that would mean lost steel sales this year of 2 million tons. That does not take into account the yield loss and the engineered scrap in the stamping process, however, which would push that figure considerably higher.

Even more difficult to figure is the longer term effect on steel consumption. Certainly there will be some pent-up demand and a catch-up effect for auto production in 2022 and 2023. But how many new-car buyers opted for a good used car instead and won’t be back in the market for years to come? And consider that all this is taking place as COVID turns America from a society of commuters to at-home workers who don’t all need cars. At a time that the market is rapidly transitioning toward electric vehicles, which may prove less steel-intensive when the material mix finally shakes out. Clearly, the impact of the microchip crisis may have ripple effects on steel that extend well past the current shortage.

SMU Events

It’s time to register for SMU’s popular Steel Hedging 101 workshop. The COVID-safe virtual event will be held on Nov. 2-3 with instructor Spencer Johnson of StoneX Financial Inc. You can sign up by clicking here.

SMU is also taking registrations for the Tampa Steel Conference on Feb. 14-16, 2022, at Marriott’s Water Street Hotel in Tampa, Fla. This will be a live and in-person event. You can learn more by clicking here. 

As always, we appreciate your business.

Tim Triplett, SMU Executive Editor, Tim@SteelMarketUpdate.com