SMU CEO Discusses Flat Rolled Steel Prices

Prices have doubled since the cycle low when we reported HRC spot base prices at $440 per ton. It took 17 weeks for prices to rise $445 per ton. The highest HRC average spot price recorded by SMU was in July 2008 when prices peaked at $1,070 per ton. We don’t expect to reach the 2008 high during this cycle, but there are no guarantees as there are still a number of issues in the market that need to be resolved.

What has pushed prices higher?

When the COVID-19 pandemic hit, the automotive industry closed down for a few months. Auto sales continued and the inventories were drawn down. Other industries were expected to slow, but for the most part they continued unabated. Construction saw jobs idled in large cities hit by the pandemic, but most projects continued, and those that were affected originally came back by early summer.

As auto plants were closed, the integrated steel mills had no option but to idle blast furnaces. According to CRU/SMU estimates, 15.4 million tons were idled, of which 2.3 million tons were permanently shut down. Today, there are still 3.3 million tons of capacity on the shelf (after the U.S. Steel #4 Gary Works furnace, which was restarted last week).

The U.S. government exacerbated the short supply situation when it withdrew the quota for Brazilian slabs in the fourth quarter. This last-minute lack of Brazilian slabs impacted mills such as California Steel, NLMK USA and AMNS Calvert. I reached out to one of these mills on Friday to see if the Brazilian quota had been released for first-quarter 2021 and as of Friday it had not.

Since it is 2020, of course, what was reported above was not all. We had unexpected mill outages due to a caster breakout at Dofasco in Canada, a hack of the computer system at Stelco in Canada, and a breakout of COVID-19 at ArcelorMittal.

We are in the midst of the perfect storm of decent-to-rising demand coupled with a shortage of supply.

We have service center inventories of flat rolled steel at around 2.0 months of supply (normal balance would be 2.5 months of supply with normal lead times of 3-5 weeks on hot rolled coil). Supply is tight.

There are slivers of silver lining out there as Big River Steel has started up their new EAF and caster, Gary Works #4 blast furnace is running, and the expectation is for the problems at Stelco and Dofasco to be resolved soon. We also have the strike situation at NLMK USA (settlement unknown) and the situation with the Brazilian slabs (which are sitting in U.S. bonded warehouses ready to ship). So, the supply situation may begin changing 30 to 60 days from today. Whether it will be enough to balance inventories (or when that might happen) is the key question of the day.

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In the meantime, we have situations at service centers similar to the call I received on Friday from a Midwestern distributor. SMU was told by this service center that no spot tons were available for quote at any price from his domestic mill suppliers. He said the mills that were “begging” for tons earlier this year can no longer offer them a steady stream of supply. “I don’t have a dependable supply. Where am I going to get product now?”

Frustrations are running high, while at the same time service centers that are selling into the spot market are making large profits (or should be based on older steel being on the floor and being able to be sold for, or close to, replacement costs). I am sure there are exceptions out there, and those will be the distributors that are in trouble once prices tank. If history is a predictor of the future, we can expect a sizable drop in steel prices at some point during 2021. When that happens, distributors and wholesalers will have to sell $900+ per ton inventories at much lower prices.

The question is, at what point will prices peak, and will they plateau or drop immediately? History shows the drop could be quick and steep….

The timing of the 32nd annual Tampa Steel Conference couldn’t be better positioned based on what is happening right now, the change to the Biden administration, the vaccine distribution which begins tomorrow (Monday) and the expectation of a change in the balance of supply/demand. The Tampa Steel Conference will be held on Tuesday, Feb. 2, 2021, and will be a one-full-day virtual event this year. You can find information about the agenda, costs to attend and how to register by clicking here.

On Wednesday of this week (Dec. 16), we will host one of our free SMU Community Chat Webinars at 11 a.m. ET. Our guest speaker will be Spencer Johnson of StoneX (formerly called FC Stone) and we will talk about the flat rolled futures markets and how accurate a predictor it is of the future market (and for that matter how well analysts predict market price movements). I think this will be helpful for those of you struggling to get more market price indicators, as well as for those of you who are interested in learning more about the futures markets. You can register for this free event by clicking here.

Spencer Johnson is also our instructor for the upcoming Steel Hedging 101: Introduction to Managing Price Risk which will be held on Jan. 26-27, 2021, and our Steel Hedging 201: Advanced Strategies & Execution workshop which will be held on Feb. 23-24, 2021. Both of these workshops are virtual, and you can learn more about the agenda, costs to attend and how to register by clicking here.

For those of you who are interested, our next Steel 101: Introduction to Steel Making & Market Fundamentals Workshop will be held on Feb. 9-10, 2021. You can learn more about its agenda, cost and how to register by clicking here.

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

John Packard, President & CEO