Final Thoughts

One consequence of slipping lead times: We’re hearing from more and more market participants something we haven’t heard in a while – that nearly all mills are reaching out and asking for orders, some say they’re practically begging.

What does begging for orders look like? Take a glance at our updated mill negotiations figures, which continue to show most mills willing to negotiate lower prices to get an order. (At least on sheet, plate continues to defy gravity in lead times as in prices.)

What is the market saying?

“I hate talking about lower prices because I have inventory, and I want prices to be higher,” one service center executive told me. “But I think we are fast returning to the path we were on prior to Mr. Putin’s invasion.”

A second service center executive echoed that sentiment. “I’m hearing from mills today who are pretty desperate. They are all looking for orders. We had a three-month reprieve because of the war, and now we’re back to where it was before the war started.”

And maybe a bit lower. “You have new capacity begging for steel,” the second exec added. “I think it’s headed down to $900, and then we’ll see what the mills do.” (Fwiw, that sub-$1,000 prediction is shared by roughly 35% of our survey respondents.)

Russian forces, as we all know, launched a full-scale invasion of Ukraine on Feb. 24. Hot-rolled coil prices, according to our records, rose $435 per ton ($21.75 per cwt) in March alone. We saw prices nearly double from $985 per ton at the start of last year to $1,955 per ton by September 2021. The climb to last September’s record high was a long slog compared to the unprecedented price spike we saw in in March.

I’ve been writing about steel and metals since 2007. SMU’s numbers go back to 2007. And there is no analogue to what we saw at the end of the first quarter of this year. March was the biggest price spike steel has seen in the last 15 years – perhaps ever. (I don’t have data pre-2007, so I’ll leave that one for someone else to figure out.) But let’s be clear that it was a spike. Price went straight up, and now they appear to be coming straight down. Spreads between highs and lows tend to balloon out when prices are moving fast. And that’s what we’re seeing now.

Recent channel checks reveal a spread of at least $200 per ton, perhaps more like $250 per ton, between what smaller spot buyers (a few truckloads or railcars) are paying versus what big buyers (thousands of tons) are paying. And that’s created a lot of unusual dislocations in the market. Can you get hot-rolled coil ~$1,000 per ton give or take if you have big tons? Yes, you can. Are smaller buys still paying closer to $1,200 per ton. Also, yes.

Let’s also consider the contract market versus the spot market. Last year, your contract was a blessing – you were able to access steel at a reasonable price when the spot market was characterized by few tons available at any price. Mills tried to make up for some of those overly generous contracts this year with restrictive terms like CRU minus 1% this year. Let’s say prices are, generously, at $1,200 per ton now. That’s a $12-per-ton discount. That’s cold comfort when larger spot buyers are in the low $1,000s per ton. (And that’s not considering some creative deals, not strictly spot, that are even lower.)

“The contract people are just being screwed compared to the spot people,” the first service center executive said. “They were getting mad until prices jumped in March – and now they are getting back to that point of getting mad.”

I don’t like to talk about the summer of 2008. I don’t think comparisons to that period should be made as lightly as they often are. But I’d be remiss if I didn’t acknowledge that some market participants fear that there are too many parallels between June 2008 and June 2022 for comfort. Some recall mills insisting then that everything was fine. That demand was good, that backlogs from the various markets they served was good … right up to the point when those backlogs vanished almost overnight. Mill executives have made similar remarks more recently. We’ll probably see more of the same when earnings season gets underway in earnest next month.

But I’m still not ready to go all in on the ’08 parallels. Prices is Asia appear to be stabilizing. And import offers for hot-rolled coil just aren’t very competitive given how fast domestic prices are falling. The discrepancies between import and domestic cold rolled and coated prices are large. But there, too, our understanding is that that gap is closing quickly.

Recall too that the US tends to both overshoot and undershoot the global market. We dropped below Asian HRC prices in the summer of 2020 – recall $440 per ton anyone? Is it possible that will happen again later this summer? It’s at least worth considering.

In the meantime, thanks from all of us at SMU for your continued business.

By Michael Cowden, Michael@SteelMarketUpdate.com