Final Thoughts

Final Thoughts

Written by Michael Cowden


It’s cliché to compare steel price cycles to a roller coaster. But the description feels apt right now.

People in the front can see a big drop coming. People in the back are still climbing.

gears

Why do I suggest we’re in for a drop? Our full survey results won’t be released until tomorrow. But we’ve already published some of the highlights. And they indicate that we’ve gotten over the initial shock of the war in Ukraine, which sent prices sharply higher through March and into April.

Lead times are down significantly for the first time in three months. And roughly half of respondents to our survey report that mills are willing to negotiate lower prices on hot-rolled coil, something we haven’t seen since the outbreak of war in Ukraine. The trend is similar, although not quite as pronounced, when it comes to galvanized.

And yet sentiment remains mostly bullish.

“People want to talk the price down, futures indicate the price is going to go down, scrap is driving us down, etc. But overall things are hanging on pretty well,” one mill executive told me.

And I know others share that view. “We’re wrapping up a wonderfully profitable April, and our backlogs are huge. So as long as there isn’t a massive correction, Q2 will be fantastic,” one survey respondent wrote.

The question is what happens in Q3. And I think the numbers might be ahead of the words there.

As most of you know, lead times typically lead prices both higher and lower. We saw that clearly last year, when hot-rolled coil lead times began flattening out and declining in May, well ahead of HRC prices – which didn’t start falling until mid-September.

A week doesn’t make a trend. But consider this. SMU’s HRC price was $1,450 per ton ($72.50 per cwt) this week, down 2% from $1,480 per ton a week earlier. HRC lead times are 5.29 weeks now, down more than 9% from 5.84 weeks in our last check of the market, according to our interactive pricing tool.

The correlation between prices and lead times is pretty tight. If that trend continues, it should raise alarm bells.

On a more basic level, our average HRC price dropped from $1,600 per ton at the beginning of the year to $1,000 per ton in early March – with the low of our range dipping into three-figure territory.

It was the war that sent prices shooting upward roughtly to where they were at the beginning of the year. The war continues to shock in terms of the human misery it has unleashed. But supply lines – like people – are resilient. And they are adjusting to the war too.

My question is this: Is there any reason why HRC prices should hold a nearly $500-per-ton premium compared to where they were before the war?

In the US, the increase was mostly a panic about covering increased costs, notably for pig iron. Is there anything on the demand side that has radically changed since mid-February, when the talk was about how far prices might fall?

On the HARDI call earlier this week, it was clear that most people in the HVAC sector still see good demand. And $100-plus per barrel oil should keep energy tubular markets humming. But what about automotive?

Does anyone really think that the chip shortage is going away in ’22? In other words, it’s hard to see auto production picking up anytime soon. And what does that mean for mill order books once we get into July, which is a slow time for automotive even in normal years?

Lastly, and I think it’s something we’ve overlooked because of the war, is just how intense Covid lockdowns have been in China. That might explain the massive gap we’re now seeing between HRC prices in the West and those in Asia. That matters because HRC prices in the US and Europe are now correcting downward toward those in Asia.

All of this is to say that we might be getting back to “normal,” or at least what normal was prior to the war, which was falling prices. That comes with one big caveat: I’m starting to feel like “normal” is like Santa. Fun for the kids.

Welcome Laura Miller!

SMU has a new joiner, Laura Miller. You might have noticed her byline and her bio in articles today.

We’re lucky to have Laura on our team because she’s one of the very few people with both steel journalism and steel industry experience.

Laura has written extensively about the steel market for Steel Business Briefing/Platts and for Kallanish Commodities. She also worked for the ThyssenKrupp Steel USA (now AM/NS Calvert) and is a past-president of the AWMI’s Pittsburgh Chapter.

I’m looking forward to the great work she’ll do here.

And, as always, thanks to all of you for your business and your continued support of SMU.

By Michael Cowden, Michael@SteelMarketUpdate.com

Michael Cowden

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