Final Thoughts

Final thoughts

Written by Michael Cowden

A Detroit-area mill entered the scrap market on Thursday offering down $70 per gross ton (gt) on #1 busheling. Also on Thursday, Nucor and Cleveland-Cliffs announced new minimum base prices for hot-rolled (HR) coil. What’s the best way to interpret what could be read as contradictory trends?

Scrap poised to fall in March…

The Detroit offers don’t mean that prime scrap will settle down $70/gt. Time will tell. But they almost certainly means scrap will be down in March, just as it was in February.

My first reaction to that news: Talk of a sheet price bottom, which had already been popping up in our survey results and pinging around some corners of the market before Nucor’s announcement, might be a little premature. Because on a very basic level, if scrap is going lower, EAF sheet mills can afford to lower steel prices without sacrificing profit.

But that’s not the only narrative out there. There is another, competing narrative that says not only that a floor is near but also that a sheet-price increase might be imminent. Or at least that one might come after the initial shock of scrap falling has passed.

Heck, some of you have basically told me, “Lol, steel doesn’t care what scrap does.” And, to be fair to that point of view, steel and scrap have to a large degree decoupled since Section 232 was rolled out way back in March 2018. (Recall that S232 put tariffs and quotas on finished and semi-finished steel imports but not on raw materials.)

As steel talks about a price hike

So back to the idea that a price increase was around the corner. You probably know the narrative that supports it by now. It goes something like this.

  1. Service center inventories might have been high at the beginning of the year. But with buyers on the sidelines and stable demand, stocks should be moving lower. And as often happens in steel, a herd of buyers will come back to the market to restock at the same time. (Editor’s note: We’ll have a better handle on what inventories are next week. We will have February service center inventory data to our premium subscribers on March 15.)
  2. Also, imports should be lower in late spring/summer because the gap between foreign and domestic sheet prices has narrowed quickly. That’s definitely happened on the hot-rolled (HR) coil side of the ledger. (That said, a wide gap remains between domestic and foreign prices for tandem products – as well as between US HR and CR prices.)
  3. Also, planned mill maintenance outages from roughly now through May could take out approximately 300,000 st of sheet capacity from the market. That number might be a little higher or lower depending on who you talk to. But it’s probably a fair rule of thumb. Let’s say a sheet mill produces 3.3 million st per year on average. That means we’re effectively losing a little more than one mill’s worth of production (275,000 st) for a month. That’s not nothing.

If the floor is durable…

Meanwhile, some of you tell me that the bottom has already passed. You say that big buyers have already entered the market and bought in the low $700s/st. You also say that those prices are no longer in the market, or won’t be for much longer following the announcements by Nucor and Cliffs.

There might be some data to support that. SMU’s HR price didn’t fall as much this week as it has in past weeks. (Our HRC price was down $15/st on average this week compared to a decline of $45/st last week and a drop of $65/st the week before that.) Could we see prices fall again next week even as lead times start to extend? That’s something to watch for because we’ve seen that at the beginning of past upcycles. Basically, a final flurry of deals at the “old price” before the market starts to move higher.

And if you’re weren’t a believer that a price increase was coming, just look at what’s been going on in HR futures lately. How did futures react to the news of significantly lower March scrap offers on Thursday? They moved up!

…would an increase stick?

That leaves me with some questions. Do the fundamentals really support higher prices? Or, with lead times now into April/May, is this simply the best time for mills to try for a price hike before the June/July summer doldrums arrive?

Also, will the announced price hikes stick? We’ve seen some increases that seemed premature at the time but proved prescient because it turned out, in retrospect, that the fundamentals did support them. Price hikes in late November 2022 and late September 2023 come to mind. (Our price increase calendar is useful for keeping track here.) Both set a floor under previously falling prices, and subsequent increases sent tags soaring higher.

But not all price hikes are created equal. We saw an increase from Cleveland-Cliffs in early January flop when scrap wobbled and when other leading mills didn’t follow. Prices subsequently fell. It was a similar story last June when a round of domestic mill sheet prices hikes succeeded more in “stopping the bleeding” than in lifting prices.

What will it be this time? And here’s a thought. The mere fact that we’re having a conversation about price increases – rather than talking about how far tags might might fall on lower scrap – is already something of a victory for those hoping that the sheet price slide stops soon.

SMU Community Chat

If you missed a good Community Chat with Worthington Steel president and CEO Geoff Gilmore on Wednesday, you can catch a recording here.

While you’re at it, don’t forget to sign up for out next Community Chat (on Wednesday, March 20 at 11 am ET) with Barry Zekelman, chairman and CEO of Zekelman Industries. You can register here.

And, as always, thanks to all of you for your continued support of SMU!

Michael Cowden

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