Final Thoughts

Q1 demand – and maybe 1H demand – is pretty good, according to our latest channel checks.

That’s not a unanimous opinion by any stretch. Some people tell us there are already signs of a slowdown. And, yes, there is uncertainty about 2H demand. But future sentiment remains strong. The strongest we’ve seen since start of the war in Ukraine.

My concern is around two stubborn facts. Capacity utilization, while it has improved modestly, remains well below ~80% this time a year ago. And lead times remain short—not bad, but not at the levels traditionally associated with the magnitude of price increases we’ve seen lately.

At some mills, for example, hot-rolled lead times are longer than those for cold-rolled and coated products. In certain cases, cold-rolled and coated lead times are shorter than those for hot band. I’m tempted to say that’s like steel’s inverted yield curve. That would be overstating it. Still, it’s a little unusual and something to keep an eye on.

Certain mills have announced three rounds of price hikes totaling $160 per ton since late November. The hikes found solid support initially on seasonal restocking amplified by momentum (buying ahead of the next anticipated increase). They were also supported by the structure of “CRU minus” contracts as well as higher CRU minus deals in 2023 than 2022.

But those factors, which initially powered prices higher, might be running out of steam. You can see that to some extent in approximately 60% of respondents to our latest survey reporting that HRC prices will peak in February or March. There is also an increasing minority who think HRC prices will hit $800/ton or more, per our survey. I interpret that as people saying we might get to ~$800/ton for hot band. But that we might not stay there for very long.

Some larger buyers – folks able to swing thousands of tons – already think they smell blood in the water. I spoke to one earlier today who thought he might be able to secure ~$700/ton for hot band. He suspects mills, which have been largely unwilling to negotiate to date, will become more amenable to considering lower prices if lead times don’t kick out in a more significant way. (Keep in mind that some mills are still struggling to close out February.)

If demand falters, or doesn’t improve much from where it is now, then I think a lot will hinge on February scrap prices. If they’re sideways, then steel prices will probably be flat at best. If scrap goes up next month, then steel probably will too. The trouble with February is scrap prices don’t typically surprise to the upside. They’re usually up a little, down a little, or flat. Notable exceptions are 2015, when scrap prices fell out of bed – a harbinger of steel prices falling for the rest of that year.

I don’t expect something cataclysmic like that this year. But I also don’t see anything that would cause prices to continue to rise significantly. If anything, I think the risk is that demand might have been pulled forward. In other words, that restocking that might have been more evenly spread over 1H has instead been frontloaded into Q1.

If that’s the case, I wouldn’t be surprised to see something like the summer of 2021 repeated on a miniature scale. Prices might continue to rise for a few more weeks on bullish sentiment. But then the gravity of lead times will catch up to them.

Recall, too, that the large contract buys for January tons (based on December spot prices), for example, are way, way below current prices. Also, some of the spot buys we’re seeing at numbers approaching $800 ton are for truckload quantities. So, yes, prices are up – but on how many tons?

On a cheerier note, this is normal market behavior – which is something we haven’t seen much of over the last three years. I’ll take mini-cycles and modest volatility over black swans any day of the week.

By Michael Cowden, michael@steelmarketupdate.com