Final Thoughts

Final Thoughts

Written by Michael Cowden

Spot prices might be wobbling. But mill balance sheets are as strong as they’ve ever been – and the cash will continue to pour in as 2022 contracts reset at substantially higher numbers.

Here are two opposing trends I’m keeping an eye on: (1) whether mills will use their cash hoards to expand outside of steel and (2) how they’ll respond in the short-term to weakening spot prices.

gearsA Bright Future

I wrote last week about what mills might do with their record profits. They’ve already invested in new capacity, and rumors are rife about potential acquisitions up and down the steel supply chain – from upstream scrap assets and other mills to downstream coating operations.

Sure, there are hurdles to overcome when it comes to valuations. Sellers will point to record high prices in 2021. Buyers will point to expectations that prices will decline next year. But it’s hard to see mills not using their war chests to add new capabilities and expand in areas where they might not have a strong presence – the West Coast, for example. Speaking of the western U.S., which has become a hub of electric vehicle production, let’s consider the possibility that a steelmaker flush with cash might decide to branch out into other areas.

Stelco addressed that issue during a quarterly earnings call earlier this month. The Hamilton, Ontario-based steelmaker has already invested heavily in its steel-related assets – a “smart” blast furnace, a pig iron caster, upgrades to its coke batteries and an electricity cogeneration facility.

And Stelco management was asked what other areas it might explore. When it comes to investing in the company as it is, “modest investments” are being considered, Stelco Chairman and CEO Alan Kestenbaum said. But, he added, “I don’t want to give you the impression that we’re going to start another capital campaign.”

Stelco thinks its cost structure is among the lowest in the industry, other companies aren’t cheap and are higher cost. “So you try and take that and say, ‘Well, what can we do that’s accretive?’ The answer is not much,” Kestenbaum said. But if you broaden the scope of potential acquisition targets, especially if you include ones that are “a little bit more futuristic,” then the equation changes. “We’ve talked about on battery metals, integration more with our auto customers – these are areas that we’re looking at,” Kestenbaum said. “Stay tuned as we continue to pursue that plan.”

SMU thinks Stelco is not the only one looking at battery metals, especially given the exponential growth seen in electric vehicles – a trend that is expected to continue in the years ahead.

So that’s the future. We’re optimists about technology, and we look forward to all the exciting developments coming down the pike with EVs.

A Blurry Present

Unfortunately, it’s hard to square such long-term optimism with mounting pessimism about carbon steel prices in the short term.

Prices for hot-rolled coil have been slipping steadily since peaking around $1,955 per ton in early September, lead times continue to move lower and service center inventories to rise. Import prices, meanwhile, remain substantially below domestic prices. And the U.S. market is probably going to have to contend with more tariff-free steel assuming the tariff-rate quota (TRQ) with the European Union serves as a template for easing Section 232 restrictions on other allies – such as Japan and South Korea.

Service centers, in anticipation of prices moving lower, have been lowering resale prices for a while now as they look to liquidate high-priced inventory. “Our activity levels are fairly steady. But they are softening from where it was,” one service center executive told SMU. “And (resale) prices are continuing to drop on an almost daily basis.” Part of the reason prices are falling is that mills’ on-time performance has improved significantly, meaning there is little urgency to buy steel now. “We’re seeing orders for December already being produced,” he said.

And while SMU’s average lead time might be 6-7 weeks for hot-rolled coil, some mills were substantially shorter than that. A Great Lakes service center executive, for example, said that HRC lead times were a month or less at certain Canadian producers. “Slowly but surely, things are opening up. Folks who had nothing for us over the past year are starting to call more and more,” said one respondent to a recent SMU survey.

And we’ve spoken with other sources who’ve said that mills are already positioning themselves to compete hard against imports in the first half of next year. They might begrudgingly accept losing an order to another domestic mill. But they want to keep their customers competitive and don’t want to lose business to mills abroad – which implies they will have to significantly lower prices next year.

Still, some buyer sources have chalked the quiet phones up to the seasonal slowdown that usually occurs ahead of Thanksgiving and Christmas. “These adjustments are typical fourth-quarter moves,” another survey respondent said.

And several noted that concerns about new capacity might be overblown because some of that capacity will be delayed for a variety of reasons. That means it won’t have as much of an impact on the market in the first half of the year as expected. Those on the more bullish side also noted that auto demand could surprise to the upside should vehicle manufacturers finally untangle their supply chains and get shortages of chips and other materials under control. “Demand is too strong, and pent-up auto demand due to the chip shortage will keep prices elevated well into 2022,” a third survey respondent said.

Sunny Florida, Tampa Steel

Wherever you think the market is headed, be sure to mark your calendar for Feb. 14-16 and join us in Florida for the annual Tampa Steel Conference.

We’ve got a great slate of speakers – mill and service center CEOs, trade policy experts and analysts whose forecasts will make you rethink yours. You can check out that agenda here, and you can register to attend here.

Thank you. As always, we here at SMU appreciate your business.

By Michael Cowden,

Michael Cowden

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