Final Thoughts

Final Thoughts

Written by Michael Cowden

Steel prices fell hard again this week. While the absolute numbers – down $60 per ton ($3 per cwt) on hot-rolled coil – might appear shocking at first glance, one could make the case that we’re being conservative.

The development shouldn’t have come as a surprise to those who lived through past ups and downs. HRC prices went up $70 per ton week-over-week in early January of this year. It shouldn’t be a stunning development that they can also fall by a similar amount.

gearsAnd if you’ve been following our lead time data, you might have expected this. Lead times, which lead prices up and down, have been falling at a much faster pace than prices for a while now. Let’s also recall that lead times in the range of three to four weeks have never coincided with four-digit HRC prices – not for as long as we’ve been tracking both.

Another big driver of the decline is the “normalization” of U.S. prices with those in the rest of the world. With U.S. prices high, imports have been rising. That was true even with Section 232 in place. And Section 232 won’t be in place as it was for much longer. The national security tariffs will be eased on the European Union effective Jan. 1, and all signs point toward a similar deal happening soon with Japan.

Perhaps the duty-circumvention case filed by Steel Dynamics Inc. (SDI) against coated flat-rolled steel made in Vietnam from Japanese substrate could set a precedent. And if other similar cases are filed and succeed, perhaps the U.S. trade landscape could be permanently altered in such a way as to support higher domestic prices over the long haul.

My mind goes back to a successful AD/CVD case filed against a raft of overseas plate suppliers, many of them not typically associated with cheap steel. That case was unprecedented in scope at the time. No, mills can’t prove injury (which they would need to do in an AD/CVD petition) after their best year ever. But the genius of an anti-circumvention case is that they don’t need to.

That’s all speculative. Let’s stick to what we know now. This isn’t 2008. Demand hasn’t fallen off a cliff. But imports have taken a greater share of demand in 2022 than domestic mills might like. And trade cases can only do so much. Also, at risk of stating the obvious, you can’t file one against your domestic competitors.

The point is this: Increased talk of trade action is a classic feature of a down market. We’re also starting to see some other features of a down market coming into view.

We’ve noticed, for example, electric arc furnace (EAF) producers are in some cases leading pricing from integrated mills down. That’s not unusual in a normal market. But it is a break from the past year when mills – whether integrated or EAF – were almost uniformly raising prices. And we’ve also seen increased competition among U.S. mills. A domestic producer might have said that HRC prices below $1,800 per ton weren’t real just a few weeks ago. Now that number might be $1,700 per ton. But if a competitor is in the mid-$1,600s, well, let’s talk.

It’s a similar story on the coated side where, depending on who you talk to, prices might be in as wide a range as ~$1,800 to $2,000 per ton. And, yes, that would be domestic prices. Why the extraordinary range? Let’s say product from Southeast Asia is available for March/April delivery in the $1,400s-1,500s per ton. Do you really want to hold the line on price and lose an order and a customer who, by the way, might be hard to win back?

Speaking of ranges, another thing we’re keeping an eye on is the spread between hot-rolled base prices and those for cold-rolled and coated products. HRC prices nearing $2,000 per ton were getting too close to stainless or aluminum levels to be sustainable. Likewise, spreads of ~$300 per ton over HRC – our galvanized base is at $1,965 per ton – are not sustainable. We’re also watching for whether a differential will emerge between HR- and CR-base galvanized. When prices are going up, mills can make a nice profit margin by charging only a modest discount for HR-base galv. With prices going down – and new capacity on the way – we’d be surprised if the differential between the two didn’t expand.

But back to the basics. Prices are down. Imports are up. And U.S. mills don’t like that.

Trade cases aside, SDI’s new mill in Sinton, Texas, is located along the coast and so is in a good position to to compete with imports. And I think we should take U.S. producers at their word when they say they are efficient enough to be able to compete with anyone in the world. But for that to happen, U.S. prices have to come down. (Heck, maybe next year or the year after we’ll be talking about U.S. exports?)

Finally – and, yes, this is maybe too cynical – but the one thing that’s missing from this market, versus an ordinary market, is announced price increases. No one needs a reminder which way prices are going when they’re moving up fast – like they did after Section 232 tariffs were rolled out in 2018 and again over the last year.

With lead times into 2022, I wouldn’t be surprised if domestic mills try to put a floor underneath falling prices. The thing is, announced price hikes have a checkered past. Yes, they can move prices up. But they can also underscore market weakness when they fail to, and so they sometimes (and counterintuitively) correlate with prices going down.

What’s a wise buyer to do with so much up in the air? “Keep your seat in the upright and locked position until the roller coaster of the steel market comes to a complete stop,” one manufacturer source said.

That’s good advice.

Thanks for your time. And, as always, Steel Market Update appreciates yours business.

By Michael Cowden,

Michael Cowden

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