Secondary Market’s Even Tighter Than Prime

Today, secondary coils are few and far between, said Greg Gross, COO and director of purchasing and sales at Blackhawk Steel Corp. in Chicago. Buyers are much more likely to accept material, even if it has flaws. “Customers are reapplying far more steel. They are saying, ‘we’re going to cut this bad part out because we need the steel and we can’t wait another 10 weeks to replace it,’” he said, referring to the current long lead times for spot orders of steel.

Prices for the small volume of secondary/nonprime coils still available are comparable to the record-high prices for prime steel, Gross said, as buyers bid up transactions to secure material at almost any cost.

Gross describes the “mayhem” in the market as unlike any time in his 45-year career. Steel prices have risen so far so fast, they seem unsustainable, and service centers and OEMs are hesitant to order steel, with lead times extending into February and March, for fear the market will turn down in the meantime. But Gross has seen no sign of that peak just yet. ”I don’t know where this is headed, but I also don’t know what’s going to stop it. Four weeks ago, I expected us to hit the wall in the first quarter. Now maybe the back part of the second quarter?”

Galvanized base prices on prime and secondary have spiked to over 60 cents a pound. “How long before that attracts imports at numbers that give North American producers pause?” he asked. “But even if buyers decided to go offshore, that material will not get here for months. So that influence can’t really be felt until the second half of the year.”

Blackhawk Steel has a captive customer in sister company Chicago American, which manufactures consumer and industrial fans, and had a good year in 2020 despite the pandemic. Margins have been lucrative as steel prices have risen, but are poised to narrow considerably this year as service centers must pay much higher prices to replenish depleted inventories. “If I bought something two months ago at 30 cents a pound, now I have to pay 45 cents to replace it—and it may get bid up to over 50 cents because people are looking under every rock to try to find material. That further fuels the fire of inflation,” Gross said.

Separating successful competitors from those who are struggling is often their bankers and how much help they can get to finance those inventories. “Credit is the quiet cancer of the steel industry,” Gross said. “When you see a 50 percent increase in the base cost of a truckload of steel, all of a sudden your credit exposure is up 50 percent. Now there is a lot of question about who is going to bite off that exposure. That is a big issue.”

Don’t count on lenders to come to the rescue and take on more risk given the current economic environment, Gross added. “If your credit line remains the same and the price doubles, you can buy half as much. And that is the reality. If you have a better credit profile than your competitors, you have a big advantage.”

Gross has seen hints of the cashflow strain the high steel prices have inflicted on normally reliable customers who are suddenly late to pay or are less active than before. “Those are the signs on the wall, and that is why we have credit insurance.”

Nonprime material is in short supply and so are resellers who specialize in the niche, as many are exiting the secondary market. Customers are so production- and quality-driven today that fewer and fewer are willing to consider working with less-than-perfect steel, even at a discount. Of course, that attitude may change a bit in the future, Gross said, as fabricators and manufacturers who were forced to settle for secondary find that they have learned how to make it work.

By Tim Triplett, tim@steelmarketupdate.com