Final Thoughts

Final Thoughts

Written by Michael Cowden

In a falling market, yesterday’s special deal is tomorrow’s prevailing price. A lot of you know that rule of thumb. What does it mean for the market now? Let’s sketch out a scenario.

I wrote last week that someone buying tens of thousands of tons of hot-rolled coil (HRC) might be seeing prices in the $800s per ton. Let’s say mid-$800s per ton. You can probably think of a few tubers, distributors, or big service centers who might be the first to be offered such “special” prices.

What happens if there aren’t enough orders from those companies to fill the mill? That mid-$800s/ton price then becomes available to another tier of big buyers, albeit not quite as big as the ones initially offered a “special” price. Maybe they can’t place tens of thousands of tons. But they might be good for 10,000 tons or so. If those folks don’t place enough, perhaps the big-buyer prices moves to people buying several thousand tons – and so it goes on down the line.

Does this mean someone buying a few hundred tons is getting HRC in the mid-$800s/ton? No. They’re probably in the mid/high $900s/ton. Perhaps $1,000/ton or more for a few truckloads. In other words, the two-tier market I’ve noted previously – with big buyers getting a big discount compared to smaller buyer– is still in place. But I wouldn’t be surprised to see the “repeatable” spot price drift lower toward the big-buyer price over the next few weeks.

You can already see this in the HRC futures market. No, futures prices don’t predict the future. Things can change fast – a pandemic, a freak snowstorms in Texas, a war – the last few years have given us plenty of surprises. But futures do represent, in part, an informed view of where people expect prices to be based on what they know now. And the low $800s per ton for July/August – which is where CME HRC futures were when I filed this article – doesn’t seem all that far-fetched given what we know now. Namely, decent demand, the typical summer doldrums, more capacity, and concerns about business activity in the second half.

I don’t want to say what we’re seeing is a buyer’s strike. That implies some coordinated action. That’s not what this is. As best as I can tell, it’s people moving to the sidelines because they’re assuming – based on what they know now – that tomorrow’s price will be better than today’s price.

I wonder whether changed views on inventory management are playing into it as well. Another old rule of thumb is that the worst thing you can do, besides pay too much for steel, is to run out of steel. You can’t sell from an empty cupboard, as the saying goes. Is that still the case? Or is it still as much the case as it used to be?

Rewind to the summer of 2019, the halcyon days before the pandemic. HRC was at $595 per ton around Memorial Day, according to SMU data. It fell to $520 per ton in July before (temporarily) rebounding. That was, at the time, a big decline – $75 per ton! It was nothing compared to last year. We were at $1,255 per ton in late May and didn’t hit a (temporary) bottom until $770 per ton in late August – a $485-per-ton decline.

Let’s go back to someone theoretically buying 10,000 tons. In the 2019 example, their inventory in theory lost $750,000 in value. In 2022 example, it lost $4.85 million. No doubt running out of steel is still the bigger sin. But paying too much is more punishing than it used to be.

Don’t get me wrong. Prices can shoot up a lot higher and a lot faster than they used to. In other words, prices could pop again if everyone steps away from the market at once and then jumps back at once. Still, I can understand the caution among buyers for the time being.

By Michael Cowden,

Michael Cowden

Read more from Michael Cowden

Latest in Final Thoughts