Final Thoughts

Final Thoughts

Written by Michael Cowden

The fog of war. That’s what we’re all dealing with now. Even in steel as realization grows that the war in Ukraine will have consequences here in North America too.

The exact contours are still uncertain. We know that pig iron prices are up sharply, and that concerns about shortages are mounting – not just for metallics but for ferroalloys as well.

gearsU.S. Steel has announced that it will spend $60 million to add 500,000 tons per year of pig iron capacity to its Gary Works in northwest Indiana. I doubt that will be the last such announcement.

That new pig iron supply isn’t expected to come online until 1H 2023, which suggests the Pittsburgh-based steelmaker doesn’t see raw material constraints as a short-term issue. I’m assuming others see it the same way.

Steel prices might not be marching higher yet. But HRC price declines have slowed. And prices for other commodities are rising.

Some U.S. lawmakers are pushing the Biden administration to hit Russian oil and gas exports with sanctions, according to media reports. The Dow closed down nearly 600 points on Tuesday. Oil was over $100 per barrel.

Will Russian steel exports also end up in the trade crosshairs? It’s worth considering.

Recall that Russia had been a big supplier of HRC to the U.S. until 2014, the year Russian forces first invaded Ukraine. The termination of a U.S. duty-suspension agreement with Russia that year brought that trade to a swift end in 2015.

Russia shipped 463,415.9 metric tonnes of hot-rolled coil to the U.S. in 2014, according to Commerce Department figures. That number fell to 8,729.6 tonnes in 2015 and has been at or close to zero ever since.

The Indicators

Futures markets – it was a big day for commodities in general, including steel – already point to big gains in HRC prices next month.

It doesn’t take a rocket scientist to put the puzzle pieces together. Higher raw material costs, lower service center inventories, and U.S. prices nearing parity with world prices. … That doesn’t look like a picture of lower steel prices to me.

It’s also worth considering whether U.S. prices might soon fall below those in Europe. And not just because of higher raw material and energy costs.

Russia is an important supplier to the U.S. market, especially when it comes to semifinished goods like steel slab. It’s an even bigger supplier to Europe, and Severstal – because of sanctions on billionaire Alexei Mordashov – has halted sales to Europe, according to Bloomberg. Who will fill that void?

But let’s bring it back to the nuts and bolts of the U.S. market.

We understand that California Steel Industries (CSI) has opened April order books at sharply lower numbers. And we’ve seen deals from a southern EAF producer at around $900 per ton ($45 per cwt). I’d think of those as lagging indicators. The West Coast often follows price trends east of the Rockies on a lag – meaning the price collapse that happened in the rest of the U.S. last month is still unfolding there.

And I wouldn’t be shocked if some of these deals cut at lower prices were made to fill out orderbooks ahead of price increase announcements. Keep in mind that prices – contrary to what you might expect – sometimes fall sharply immediately ahead of (and sometimes shortly after) price hikes. You know how it goes, mills agree to temporary discounts as buyers try to get one last order in at “old” pricing levels.

We can’t say for certain that is what’s happening now. But we know that Cleveland-Cliffs Inc. and Nucor Corp. have already announced price hikes of $50 per ton. Steel Dynamics Inc. (SDI) has shifted lead times for almost all sheet products to “inquire” – which is something that sometimes happens shortly ahead of a price hike. (SDI, unlike Cliffs and Nucor, doesn’t typically announce anything.)

In other words, it’s possible that this market could be whipsawed upward as buyers – with fresh memories of steel shortages in the early days of the pandemic – end their strike and buy buffer stock once they sense that prices are bottoming. It would be better if everyone didn’t enter and leave the market at the same time. But human nature being what it is, that’s rarely what happens. We’re more like sheep than we might care to admit.

A Change in Sentiment, in Prices and in Geopolitics

Here’s another one to keep an eye on. SMU asked people who took our survey this week  (you know who you are, and thanks for your participation) whether the invasion of Ukraine by Russian forces might impact their business.

Here are some answers that I expected to see:

It has no direct impact at this time.”

It has certainly scared everyone that we may have additional material shortages again.”

Raw materials will be under pressure for the foreseeable future, which will drive pricing up. The wildcard is if the war in Ukraine hurts demand here domestically.”

Here are some that caught me a little by surprise:

We will not be buying Russian steel.”

Customers will boycott purchases from (Russian steelmakers with operations in the U.S.)

To be clear, the latter are a minority of survey respondents. But I’ve also received calls and emails expressing similar sentiment. Is that just talk, or will such views have a real impact on the market?

And, finally, a reminder to be kind to one another.

The headlines we see now out of Ukraine – of cargo ships being shelled, of plants stopping because of attacks or feared attacks – feel as if they were from another, darker era. So too do heart-wrenching photos of wounded civilians and lines of refugees.

The policy response in the U.S, the EU and other regions has been almost as swift as developments on the ground in Ukraine. It’s hard to keep up with the policy changes, our own feelings and the market at the same time. That’s OK.

By Michael Cowden,

Michael Cowden

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