Final Thoughts

This evening I will go out to dinner (outside dining with proper social distancing), play some card games, listen to music, and otherwise amuse myself away from the noise of the talking heads on TV. Around 10 p.m. ET I will then focus my attention on the election results, understanding that the votes cast may not be totally tabulated until later this week (BTW – why can’t other states do what Florida does and allow the counting of the mail-in ballots prior to today? The FL mail-in ballots are tabulated and kept in a computer system not connected to the internet. The vote totals are not available to anyone until today).

No matter who wins the presidency, Senate and House, the U.S. economy will remain strong. Business will continue. Taxes will still be collected. My kids will still need new shoes. There will be another presidential election in four years. We will have plenty of time for partisan bickering – or maybe to decide it really isn’t worth the hassle and instead we try to solve the problems that prevent us as a nation from ensuring that everyone has the chance to enjoy a long life and the American dream.

For those of you who do not live in the United States, you may be scratching your head and wondering what just happened?

Maine Senator August King provided an observation often misquoted as coming directly from Winston Churchill when he said, “”Winston Churchill once famously observed that Americans will always do the right thing, only after they have tried everything else.”

The United States of America is a 232-year experiment in democracy (U.S. Constitution was signed on Sept. 17, 1787, by delegates to the Constitutional Convention in Philadelphia).

Let’s Talk Steel

When markets get tight and steel mills feel “frisky” you will see them attempt to make changes to established practices that have not been working in their favor. One that immediately comes to my mind is the practice of freight equalization. Freight equalization is where a customer is sold steel utilizing the freight rate from the closest producing mill for that product. Example: If ABC mill is located in Chicago and it is trying to sell a customer in Georgia, it could use Nucor Decatur as the potential freight equalization point.

This week Nucor announced a change to the way it is going to sell steel plate (beginning in January 2021). Prior to their announcement, plate was sold on a theoretical basis freight prepaid (delivered) to the buyer. The Nucor announcement changes the rules to now be FOB the mill with specific freights to be added to the invoice depending on where the customer is located.

Cleveland-Cliffs has been saying the Trump administration will impose tariffs on foreign electrical steels due to national security concerns (Section 232). Lourenco Goncalves of Cleveland-Cliffs said in a press release on Monday, “On behalf of Cleveland-Cliffs and 1,400 workers who melt and manufacture electrical steel, I strongly commend and thank President Trump, U.S. Trade Representative Ambassador Robert Lighthizer, and Secretary of Commerce Wilbur Ross, for taking action under Section 232 to end the circumvention of existing national security tariffs covering GOES. Furthermore, I am pleased that the Department of Commerce will take action to re-evaluate recently-granted GOES Section 232 product exclusions. These actions should be viewed as a condemnation of those seeking to circumvent tariffs and quotas imposed under our trade laws and of companies abusing the steel Section 232 product exclusion process.”

The Trump administration has yet to make any final announcements of tariffs on GOES (grain oriented electrical steels).

Nothing new on the NLMK USA strike front. Although we did learn the Farrell, Pa., mill set a production record recently using only salaried workers….

Interesting comments received from one of the steel mills today:

• Nobody has been able to build inventory out there, and some are really struggling to get what they need. Obviously, there is no traditional year-end buy for the guys who like to load up in support of fixed priced commitments… and who eschew financial hedging. The players who like make their money on inventory price volatility will not be able to capitalize in this up-cycle.
• All segments are busy except Energy… even Ag is decent.
• Offshore supply has very limited appeal, and only on the coasts.
• Global steel and commodities prices [are] up.
• A customer actively speculated to me that the mills might go to price-in-effect at time of shipment… not sure that will happen, but who knows.
• Will the lame-duck Congress push through additional CARES Act-type funding? (Hopefully more restrained and targeted to those who really need it.) That is sorely needed to keep some economic momentum.

There were also comments made by this mill regarding the inability of a few steel mills to produce and ship product on time. This is helping keep supply tight, preventing the building of inventories and putting buyers in the position of having to buy no matter the price.

I also had a discussion about contracts and contract negotiations with one service center telling me contract customers are being frightened away from negotiations and sticking with spot pricing for awhile in the belief that things will turn around in their favor sometime during first-quarter 2021.

A second service center executive echoed the one above when he told me his company was holding off on any new contracts (or renewed contracts) because, “The mills have gotten insane.” By that he meant the mills were less generous with discounts (off CRU), changing rules regarding freight equalization and “severely” limiting tonnage restrictions (minimums/maximums allowed to purchase at contract pricing). This executive told SMU they have some customers that negotiate directly with the steel mills and they too were having problems finding a footing from which to negotiate.

One more thing we need to look at – the big “A” word – allocation. We do not think we will be moving into a shortage situation, but if supply does not keep up with demand and inventories cannot be rebuilt, then we could have some issues where supply disappears.

One of our service center readers sent me a note after having read one of our Premium newsletters. The article was about supply and his comment was, “So if… supply has risen 2.6% over the last 3 mos, isn’t the question ‘has demand increased by more than 2.6% in the same timeframe,’ the right one to be asking ourselves?

I’m finding myself constantly telling folks that prices are rising -and will continue to do so, because supply is not keeping up with demand, at least at this point in time… Yes, at some point the two will converge and we’ll correct, but I’m bullish on price for now, and until we get actual evidence that supply is or will increase (higher domestic output from restarts or new capacity coming on line, higher imports (but they will lag badly), lower exports, etc).”

Right now, the service centers are banking on supply overtaking demand and there being plenty of steel available in the coming months. However, that is not a done deal. We understand from steel buyers that USS, ArcelorMittal, Stelco, Algoma and even some of the EAF mills are having difficulties delivering steel on time. As one service center executive told us on Oct. 29, “I think there is enough steel, and each week the output is increasing. But short term (into December) the booming auto demand and other demand recovering is moving prices back toward normal levels.  ArcelorMittal has really struggled producing and getting slabs to the correct hot strip mill under this BF scenario. Their bad performance has seriously affected auto and in turn the rest of the market. This is really key to the current market shortage. Add in the absence of Stelco, and the NLMK strike, and the pinch is real.

“Mills holding back December availability is the perfect play in this environment. They have many weeks to allow buyers to access product at $700 before they would need to consider discounting. If the demand remains urgent at the $700 level, prices could move up further.”

The rumor mill is for another flat rolled price increase, and it may be a big one ($50 or higher)….

If a new mill increase comes (and it seems like it is baked into the cake) then expect buyers on the coasts to entertain more foreign offers….

The balance of this year is going to be very interesting.

As always, your business is truly appreciated by all of us here at Steel Market Update.

John Packard, President & CEO