Final Thoughts

What matters to SMU is what it means for the North American steel market, ferrous supply chains, and flat-rolled steel prices.

Feldstein’s crystal ball

David Feldstein, president of Rock Trading Advisors, pointed out in a column on Thursday that oil, diesel, and gasoline futures had already seen a sudden spike on the widening Israel-Iran conflict. Futures for agricultural commodities had also rallied.

That all happened before the US strike on Iran’s nuclear facilities over the weekend. Basically, Feldstein’s column turned out to be prescient. It’s linked here and worth a read if you haven’t read it yet.

There is an old saying in steel that oil, coil, and scrap trend together. As of last week, steel prices continued to tick higher on Section 232 tariffs doubling to 50%. And ferrous scrap appeared headed for a “strong sideways” settlement in July.

Those developments had little to do with the Middle East. But one indicator was already flashing red: freight rates were moving higher in part because of higher fuel costs stemming from the fighting between Israel and Iran.

Steel didn’t see this coming

As best as I could tell from our survey data and from speaking to some of you, not many people in the North American steel market had direct US involvement in a Middle East conflict their bingo card. Most of the talk was about so-so demand and the summer doldrums limiting the upside on prices. Sure, Section 232 tariffs doubling to 50% had made their mark. But the potential trade deals with traditional US allies such as Canada and Mexico had blunted their impact.

Yes, prices were going up. Albeit not as quickly as people expected after Trump first announced the 50% tariffs in late May. Sure, lead times had stretched out on some increased buying and as some import volumes shifted to domestic mills. But increased domestic capacity and uneven demand would keep a lid on prices and lead times – unless something unexpected happened.

What if oil hits $100/barrel?

That unexpected something has now happened. And there is talk of oil hitting $100 per barrel. The last time that happened was when Russia launched its full-scale invasion of Ukraine in February 2022. We all know what happened then. Steel prices had been falling in early 2022 after supply overshot demand in late 2021. But the market abruptly shifted higher on Russia’s invasion.

Case in point: Hot-rolled coil prices stood at $1,020 per short ton on average on Feb. 22, just two days before Russia’s invasion. HR prices then spiked to $1,480/st by mid/late April. HR lead times, which averaged 3.8 weeks at the beginning of 2022, stretched out to nearly six weeks by late March. (Editor’s note: SMU’s interactive pricing tool allows you to visualize HR prices, scrap prices, and HR lead times in the same chart.)

For steel, there were fears that EAF mills would not be able to get enough pig iron. That fear stemmed from Brazil, Ukraine, and Russia each accounting for approximately one third of global pig iron supplies. And two-thirds of that volume had suddenly been called into question. Price doesn’t matter as much as securing material in times of real or perceived scarcity.

Over time, mills found ways to stretch their scrap supplies. Brazil was able to fill much of the void left by Russia. And the panic buying across the ferrous supply chain in February-March 2022 led to a 2H glut. (I remember visiting some mills that were still sitting on mountains of pig iron into Q4 2022.)

I’m not highlighting the Russia-Ukraine war because I think we’re going to see a repeat of 2022. It’s too early to say whether or not the Iran conflict and its impact will remain “contained” within the region. I note it because it’s arguably the most recent precedent we have. And, as American author Mark Twain said (or might have said), “History never repeats itself, but if does often rhyme.”

One thing is certain: more uncertainty

Let’s assume oil goes significantly higher and the rig count, which has been drifting lower, suddenly whipsaws higher. That would increase demand for oil country tubular goods (OCTG) and for the coil used to make them.

Maybe higher agriculture prices could spur demand in a US ag market that relies heavily on exports and that to date has been hurt by tariffs? And perhaps steel consumers who have been buying hand-to-mouth might finally stock up on the prospect of a sustained period of higher steel prices?

But there are also some factors that could keep prices in check. The domestic steel market has been grappling with tariff-related uncertainty since “Liberation Day” in early April. That uncertainty has kept many buyers on the sidelines. Now there is war/geopolitical uncertainty on top of trade-policy uncertainty. Why would that give steel consumers more confidence to go out and buy?

If there is a saving grace, it’s that the US has vibrant domestic oil and gas industry. We’ve been a net annual energy exporter since 2019 and exported the most on record in 2023, according to the US Energy Information Administration. That sure helps to hedge against any oil-market shocks stemming from events abroad. (Europe, which relies heavily on imported energy has not been so lucky. But I digress.)

A lot depends on what happens in the days ahead. I wish I could fast-forward to a week or a month from now and tell you what comes next. For now we’re just going to have to brace for yet more volatility.

Aluminum Market Update

Steel Market Update has been closely following tariffs developments and what they mean for the steel market. And we’ll keep you apprised of what rapidly escalating tensions in the Middle East might mean for your business.

Our new sister publication, Aluminum Market Update (AMU), will do the same for aluminum and nonferrous scrap. AMU has plenty of insightful articles on everything from tariffs and trade to the rise of AI and what it means for energy – and for energy-intensive businesses like primary aluminum.

Check out the latest by signing up for a free 30-day trial here. And if you like what you see, please consider a subscription.

Until next time, thanks to all of you for your continued business. We really do appreciate it.