Michael Cowden on Steel Prices, Green Steel, Inflation, Steel Summit

And finally, I want to thank the Boy Scouts of America for hosting a great dinner in downtown Chicago. It was my first time attending, and I look forward to going to many more in the future.

Below are a few thoughts that came up in the course of those meetings and discussions, on stage and along the sidelines.

Look Out Below

How far will steel prices (or the stock market) fall, and when will we bottom out?

I don’t think anyone really has the answer. And Steel Market Update doesn’t do forecasts. But our recent survey data shows no signs of a near-term bottom.

Take lead times and prices. Our hot-rolled coil (HRC) lead time is at 4.84 weeks, which is normal to above average in a normal market. We’ll next update lead time data on Thursday, and I’m guessing that we’ll continue to see declines.

Even if we don’t, the problem is this: Lead times are at or approaching normal. But we’re still a long, long way from normal when it comes to prices. We’ll next update our prices on Tuesday. As of last Tuesday, we were at $1,350 per ton ($67.50 per cwt) for HRC. That last time HRC lead times were below five weeks was on March 1, according to our interactive pricing tool. HRC prices at the time were $1,000 per ton.

Was that normal? No. The market was falling to start the year, and we never answered the question of the where the bottom was because of the war in Ukraine. The various shocks caused by Covid mean we haven’t seen a “normal” market since January and February of 2020, before the pandemic roiled North American markets. By that early Q1’20 standard, we’re still very, very high when it comes to prices. Recall that prior to the pandemic, the highest price we’d ever recorded was $1,070 per ton – in the summer of 2008. Those of you around the industry for long enough know that’s shorthand for ‘Watch out! Here comes the next big crisis.’

There is a lot of post-GFC PTSD out there. I’m not in that camp. The music is changing when it comes to demand. It has not stopped. But I think it’s fair to say that, in sheet at least, we are shifting back to a cost-plus market. What are costs? That’s hard to say because those are in flux too. Will scrap prices fall next month? The early signs are that they will. How far will scrap fall? I don’t know. And it’s hard to say where the bottom is for selling prices when the bottom for costs is moving fast too.

There was chatter along the various sidelines that HRC prices could fall back to $1,100-1,200 per ton and perhaps as low as $800-1,000 per ton. Some on the very bearish side offered even lower numbers. I don’t see how you justify really low numbers unless you’re using historical data in a vacuum and not taking current market conditions into account. But I think it’s fair to expect continued downward pressure as more new mills ramp up, and as they lower prices to compete with imports.

Inflation, Meet Deflation

There was a lot of talk about inflation. I don’t have much to add to that discussion: labor is still in short supply, and high diesel prices are a huge problem for the distribution side just as high gas prices are for consumers. What struck me was that in some conversations we were talking about inflation and where steel prices would bottom almost in the same breath. It was almost like an introduction: Inflation, meet deflation.

That phrase might not age well. But it’s worth considering the possibility that we’re hitting peak inflation in the mainstream media and in political rhetoric even as we’ve already passed that peak and are headed down the other side in some commodity markets. I also suggest thinking about that because what emerged from conversations was a very inconsistent narrative about demand.

The official line is that demand is strong enough to make most problems – high prices, labor shortages, supply chain disruptions – manageable. It’s hard to square that with some chatter on the sidelines about how things have really slowed down lately, and that it won’t be long before the labor shortage is a fond memory. Heck, one executive might say demand was holding up, another that it was terrible. Both might work for the same company. That’s worth paying attention to. Because our survey data has shown that demand, while stable, is growing less rapidly. 

Maybe whether demand is good or not is the wrong question. We learned from the Community Chat that Ukraine supplies 70% of the world’s neon gas, a key component in making semiconductors. And I heard again and again last week that the chip shortage was affecting not only automotive but also ag, heavy equipment, appliance – the list goes on and on. Simply put, we’re using more chips. I think the question is whether demand is willing to wait for supply. You can see a nearly empty dealer lot and come to very different conclusions. One is that demand for vehicles is red hot and dealers can’t keep inventory. Another is that the supply chain is broken, and dealers can’t get inventory – which could become a convenient mask to put over lackluster demand. (Remember the American Axle strike in 2008, anyone?) 

It’s the same problem in the housing market. Demand is there. But will high prices cause demand destruction? I’ve also talked to people leery of oil’s long-term staying power above $100 per barrel. The cure for high prices is high prices – and that cure might be coming sooner than we think.

“Green” Premiums

Those in the aluminum market are familiar with the concept of Midwest premium, an adder to the base price to account for delivery to the US Midwest. Will steel see a similar premium, or at least some kind of surcharge, when it comes to low-C02, or “green,” steel?

It’s already getting real in Europe. Carbon will cost you. In the US, the conversation around C02 is happening mostly at a high level: among politicians, steel mills and big companies like automakers. Still, mills are rolling out new, branded steels – think US Steel’s verdeX or Nucor’s Econiq – sporting lower carbon emissions. And you can see why sectors directly facing consumers, such as automotive, might be eager to adopt steel seen as more environmentally friendly. When will smaller spot buyers – someone buying a few truckloads or trainloads of steel – start paying more for lower CO2 steel?

We’re not surveying people about the price for “green” steel this week. Not yet. But it’s something that we’ve considered adding. The question is when. I don’t think it’s something we’re going to have to worry about this year. But I want to have it on my radar so I’m ready a year from now.

The last big round of international steel trade talks has mostly wrapped up. That round resulted in tariff-rate quota (TRQ) agreements with the European Union, Japan and the United Kingdom. The EU set the pace for those talks. And the TRQ agreement reached with the EU served as a template for the TRQ deals reached with Japan and the UK. The US and the EU are trying to come up with a common set of rules on reducing C02 emissions in steel and aluminum by 2024. That’s not as far off as you might think. And it’s not just something for steelmakers to consider, it’s also something to consider if you’re operating a fleet of trucks or shipping material across oceans., In

That’s just a food for thought. When do you think SMU should start asking about “green” steel in surveys?

In the meantime, thanks from all of us at Steel Market Update for your business.

Steel Summit

We are now 14 weeks out from the beginning of the 2022 SMU Steel Summit Conference. Registrations are approaching 600 executives with the following companies having registered new people over the past few working days (those with an * means more than one person was registered): AEGIS Hedging, Carlisle Construction Materials*, Hartree Metallia LLC*, JLG, M&M Manufacturing Inc.*, Marubeni-Itochu Steel America (MISA)*, Mica Metal Solutions LLC, New Process Steel, North Star BlueScope Steel, Oshkosh Corporation, Triple-S Steel*.

You can add your company to the anticipated 500 other companies who will be attending the August 22-24th event by clicking here or going to the conference website: https://events.crugroup.com/smusteelsummit/home

By Michael Cowden, Michael@SteelMarketUpdate.com