Final Thoughts

Final Thoughts

Written by Michael Cowden

Steel prices really took a dive this week. I’ve noted before that some of that could be explained by seasonal factors. And it doesn’t help that inflation and rising interest rates are hurting consumer demand.

But it’s also important to keep an eye on what was said during recent earnings calls. Because I think some of it really spooked the market.


Let’s say you were hoping for a strike or lockout at US Steel to reduce supply. The Pittsburgh-based steelmaker didn’t give you any reason to think either outcome was likely.

Here is company president and CEO David Burritt on the company’s Q3 earnings call: “We continue to bargain in good faith. … I’m optimistic about the framework being developed, and we’re confident that we’ll reach an agreement that is best for all.”

That stands in stark contrast to some of the heated rhetoric that has come from the United Steelworkers (USW) union.

With the market as weak as it is, my assumption is US Steel would have a stronger hand to play with a lockout than the USW with a strike. And Burritt gave no indication of one. Instead, he said he’d get back to analysts “as soon as we have an agreement.”

If that happens, it would mean this year will have turned out a lot like 2018 as far as steel labor talks go. A bunch of heated rhetoric, and then everyone has a deal by the end of November.

Perhaps you thought producers would be “disciplined” in restraining output. You know, idle capacity to manage the price decline. I’ve always been skeptical of that idea. Discipline is easy in a strong market; it’s difficult if not impossible in a weak one.

That’s especially so when one steelmaker is publicly saying it has no intention of maintaining discipline — while also accusing others of chasing prices down. Enter comments from Cleveland-Cliffs’ chairman, president and CEO Lourenco Goncalves on the steelmaker’s Q3 earnings call.

“We are not going to take equipment down just to implement discipline in the market if others are completely undisciplined,” Goncalves said. “We run our assets to minimize our costs. As long as we can make money, we will run. … because we can generate cash that way.”

In case you somehow missed the point, Goncalves also put it in more blunt terms: “Don’t count on me to take my capacity out to make the life of others better.”

Contrast that with what Goncalves said during an earnings call in February 2021, when steel prices were surging upward.

“With our very relevant position as a player in the newly consolidated US domestic market, we are taking a disciplined approach to supply,” he said at the time. “We will continue to manage our customer needs and will not restart capacity on a whim just to add tonnage to the spot market. That would not be good for anyone.”

Our intention is not to pick on Cliffs here. You could probably look at public comments from other mills and come away with some sharp differences between what is being said now versus what was said in 2021.

That said, our channel checks with market participants indicate that Cliffs has been true to its word. It and certain other steelmakers, we’re told, have gone out and aggressively taken in orders. And that might mean that some who weren’t as aggressive are now struggling to secure spot tonnage. That helps to explain the swift drop in prices.

Another consequence of falling prices has been a change in buying patterns. More buyers are opting to ride the spot market lower rather than to buy on contract terms. Consensus, whether correct or not, is that spot prices will continue to move lower from one week to the next.

Buyers tell us they have also been able to negotiate much more favorable contracts terms this year for 2023. Maybe they received CRU minus 1–2% last year. This year it might be CRU minus 4–6% — and with extras on grades and widths either unchanged or lower.

That’s assuming they have committed to contracts. We’re also told that many buyers continue to wait to commit to 2023 contracts, assuming, as is the case in the spot market, that next week will bring a better deal than this week.

Ironic that, in a time when inflation dominates the headlines, we’re seeing the classic definition of deflation in the steel market.

By Michael Cowden,

Michael Cowden

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