HRC-Galv Base Spread Narrows—Sound or Noise?

Hot-rolled coil prices are up nearly 157% from a 2020 low of $440 per ton recorded on Aug. 11 while galvanized prices have doubled since then, when they stood at $640 per ton. But the spread between the two products has narrowed 25% from $200 per ton in August.

That approximately $200-per-ton spread also characterized the flat-rolled steel market in late April, when steel prices sunk to what were at the time lows for the year following the outbreak of the Covid-19 pandemic in the U.S. and the idling of North American auto assembly plants in response to the virus crisis.

So, what’s behind the narrowing of the HR-coated base spread despite prices generally rebounding in the second half of last year and into 2021?

It’s Noise

The variance in spreads might have narrowed but is probably nothing significant or enduring, some sources said.

Hot-rolled prices are approximately $1,100-1,200 per ton and coated base is as high as nearly $1,350 in some cases–meaning $200-per-ton spreads are still there, one mill source said. “It is likely noise you are hearing.”

A Midwest service center source agreed that the HRC-coated base spread has settled in at around $150 per ton recently. But he pointed out that it has at times been as narrow $100 per ton. “Not sure if this means anything or not, so I would just chalk it up to noise currently,” he said.

It’s Sound

But others think there is some “there” there.

The main issue is that hot-rolled coil is in short supply. “Customers seem to be buying (hot-rolled coil) at any price just to cover their projected demand,” a second mill source said.

That means mills can charge a premium for hot-rolled coil and buyers are willing to accept the higher price in order to secure scant spot tonnage. “The spread is compressed a little. I believe it is due to the higher demand for hot roll and the fact that there is NO spot availability,” a third mill source said. “If there is availability, the mills know there is a shortage and the service centers know they can’t get it anywhere–so if they are offered something they take it.”

Hot-rolled coil is in short supply because mills that had been reliable sources of it before the Covid-19 outbreak are idled or operating at only a fraction of their normal capacity, several sources said.

The Tri-State Squeeze

Take the Pittsburgh-Cleveland area. The region has seen hot-rolled coil supplies squeezed by a protracted strike at NLMK USA’s Pennsylvania operations, an outage for furnace upgrades at JSW Steel USA’s sheet mill in Mingo Junction, Ohio, and Cleveland-Cliffs running only one of two blast furnaces at its steel mill in Cleveland.

Those facilities are not making as much hot-rolled as they used to. But coaters in the area still have a healthy appetite for substrate. In that region alone, major coaters include Steel Dynamics Inc.’s (SDI’s) The Techs; Sharon Coating, located just a few miles from NLMK Pennsylvania; and Wheeling-Nippon Steel in Follansbee, W.Va.

“It has just created this vortex,” one Ohio Valley service center source said of the inability of coaters to source as much substrate as usual from regional mills.

And the impact of that vortex has rippled down the supply chain, with service centers large and small often able to secure only the minimum tonnage stipulated by their contracts and, in some cases, little or no spot tonnage. Indeed, some service centers are owed thousands of tons by mills that are running unusually late on delivery, he said.

In the past, galvanized product carried a premium, and certain mills were “giving it (hot-rolled coil) away like Girl Scout cookies,” the Ohio Valley source said. Now, in contrast, hot-rolled coil is “the prime product.”

A similar situation has played out in the plate market, where hot-rolled coil, which usually transacts at a discount to plate, is now selling at a premium to it. The scenario also harks back to the 2007-08 construction boom, when rebar at times sold for more than wire rod, despite wire rod being more costly and complicated to make.

And the situation is hardly limited to the tri-state area. Other sources noted a similar phenomenon.

Supply and demand for coated products is more in balance in some Midwestern markets than that for hot-rolled and cold-rolled material, a second Midwest service center source said. He chalked it up in part to mills with their own coating lines having to supply more substrate than usual from their own facilities.

“It’s supply and demand…. So the rising tide is lifting that (coated) ship, just not quite as fast as the other (hot rolled),” he said.

And while most sources said that demand for both products remained firm, the Midwest source said that he has had less trouble recently securing his galvanized tonnage than his hot-rolled requirements. Might that be an early sign that certain markets–automotive because of chip shortages or non-residential construction–are faltering?

“I think there is something to the fact that demand for coated is not increasing, it’s not as dynamic–but that’s just my experience. I don’t know how it’s going across the board,” the Midwest source said.

Back To $200 Per Ton?

Whatever the case on the demand side, some sources speculated that hot-rolled coil’s sharp rise in recent weeks could result in the spread between it and coated base returning to the roughly $100-140 per ton spread that characterized past markets instead of the $200-per-ton spread that has become common in recent years.

Others said that was wishful thinking. “That ($100-140 per ton) is the old norm. I really feel like when the dust settles on this and the hot-rolled coil number comes back to reality…they (mills) will boost that spread back to at least $8/cwt ($160 per ton),” the second Midwest source said.

By Michael Cowden, michael@steelmarketupdate.com