Final Thoughts

I have been thinking about some of the price and supply crises we have had in the past. The most notable from the recent past would be the rise in prices from August 2007 when benchmark hot rolled prices bottomed at $500 per ton ($25.00/cwt) and then rose, slowly at first, climbing to $540 per ton ($27.00/cwt) by Christmas before rocketing to $1,070 per ton ($53.50/cwt) by early July 2008.

As I think back to that time in history, the 2008 peak in pricing was achieved at the same time as the residential mortgage market was unraveling, ultimately causing a crash in the economy by the fall of 2008.

Today is much different than 2007-2008 as the economy is waking, not weakening. Inventories are low, not building. Supply is short and demand is quite high. All indicators are that this market has legs, with room to run for some time to come.

Mark Millett, President & CEO of Steel Dynamics, spoke about demand this morning during SDI’s earnings conference call with analysts. “Steel demand is strong across the steel platform, including both flat and long steel products. However, the flat-rolled steel markets remain especially tight. Underlying demand for flat-rolled steel products recovered much more quickly than expected in the second half of last year and gained further momentum in this recent first quarter. When coupled with historically low customer inventory levels across the supply chain, flat-rolled steel prices have been supported at historically high levels. And customers are placing orders for immediate demand requirements. They have not built — rebuilt inventories since the speculative risk associated with the accumulation of higher priced inventory is a significant deterrent, even if it was available.

“Additionally, we believe current legislated steel trade policies will continue to moderate steel imports. The current U.S. administration has also commented constructively concerning trade parameters and the issues with China. From an end market perspective, the automotive sector has experienced the strongest recovery, operating at very high production levels due to low inventories coupled with strong consumer demand.

“March’s seasonally adjusted production represented almost 18 million units and inventories were close to 30% below the five-year average. We’ve been fortunate that our automotive order book has not seen any significant impact from the current electronic chip shortage. The non-residential construction sector remained strong with continued positive momentum as evidenced by record Structural and Rail Division shipments, record steel fabrication shipments and strong customer backlogs. We expect this strength to continue through the rest of this year and certainly into next year.

“Residential construction has also been strong, producing high demand for related HVAC and appliance products. In addition to supporting high non-residential construction demand, the growing online retail shift is supporting steel demand strength throughout the supply chain service providers, such as truck trailer and material handling. We’re also seeing healthy demand for mining and yellow goods customers at our Engineered Bar Products Division.

“In the energy sector, solar is a substantially growing market, and we’re also seeing some indications of improved oil and gas activity….”

The SMU Price Momentum Indicator continues to point to higher steel prices in the coming weeks. SMU is aware of one integrated mill offering spot hot rolled (what limited amounts are available) at $76.00/cwt ($1,520 per ton) and galvanized base prices at $90.00/cwt ($1,800 per ton). Completely mind-numbing numbers for this old guy (me) to fathom.

I received interesting comments today from a large manufacturing company. The idea of short supply and high prices was not sitting well with this steel buyer as he told us:

“We are active buyers, and beyond contracts we are buying everything we can on the open markets that is reasonably priced…and some that is unreasonably priced too. Certain mills from around the world, along with their trading arms, are taking cues from the domestic mills and have gotten totally intoxicated with greed: ‘Hey, what’s good for me, is good for me.’

“Some foreign pricing is quite reasonable and others, specifically from one nameless island in the Pacific Rim and not far from China, have gotten egregiously out of line.

“The greed being pushed down is what will kill this market…but it will come in the form of fear.

“There are only two things that fuel a market, they are fear and greed. The gulf between the two is growing as wide as the ocean, and at a point enough will be enough and the buyers will thankfully wrest back the controls.

“It will be the fear of buying at the highest numbers that will make buyers sit on their hands.

“There is only so much we can push through to our customer base and certain customers have already said ‘no,’ which is really complicating things in our effort to recover this growing cost gap.

“The SMA says this is good for everyone. The Fed says we can stand more inflation before it becomes a problem. It’s nice that powerful lobbying groups have a voice in Washington, but what they are selling is greed, and our friends inside the Washington Beltway have no clue of the destruction taking place to businesses because of this outrageous run-up in price.

“The WSJ printed an article last week indicating that these kinds of price run-ups are good, and backed it up by suggesting that manufacturers have traditionally expanded margins in price situations like this. We will see how this plays out, but it is more likely that very few manufacturers enjoy the luxury of being able to expand margins in this market. In fact, it is more likely that any remaining margin is rapidly evaporating.

“It seems to me that all parties previously indicated are living in a self-serving dreamworld. This is kind of like the character Miles Monroe in the Woody Allen movie, ‘Sleeper,’ where he dies during a routine surgery, his family cryogenically freezes him, and then he wakes up 200 years in the future only to find out that Twinkies are now health food.

“How these pricing levels won’t kill demand is beyond good reasoning. Steel has doubled, lumber has tripled, aluminum ingot is up 70%, fuel is up 30%… But this is supposed to be a good thing and is not considered as core inflation? Nonsense! How these pricing levels are good for everyone is simply a fool’s errand.

“Will prices crash when the market turns? We better all hope not or we’ll all be out of business.

“There are too few domestic mill players that have become way close to running a monopoly game for them to become ignorant overnight and let the market slip from them.

“We need pricing to stay and remain elevated, so we don’t all get crushed when things turn.

“In the meantime, though, we need some balance. Enough is enough with this predatory pricing behavior and aggressive actions. Will some of the adults in the room please take control of the game so the mills ‘do not pass go and do not collect another $200’?”

I did speak to one of the mills this afternoon who told me they are protecting their contract customers whose businesses are booming. The mill is committed as a sole supplier to many of these companies and must keep their customers supplied. The result is pressure on the spot markets as the greater percentage of the mill’s order book is overtaken by their contract customers.

The SDI CEO spoke of this in his comments today. I expect other mill CEOs will be making similar comments as they report their earnings and explain what is happening with their businesses.

One service center executive told me that the “downside risk exceeds the upside risk, which in turn keeps demand down.” In other words, his company would be afraid to build inventory (if spot was available) at these prices unless it was being hedged.

I did speak to a few steel buyers today who told me the market is good right now for hedging future purchases. If you would like to learn more about what that means, I recommend you attend one of our hedging steel price risk workshops. The next Steel Hedging 101 Workshop will be held on June 2-3. You can learn more about this workshop and our other managing price risk workshops by clicking here.

I am looking forward to our SMU Steel Summit Conference going live on Aug. 23-25. I am working hard on our agenda and recruiting speakers who can bring value to the subject matter and help attendees deal with issues that will be on their desks in 2022 and beyond. Over the past couple of days, I worked on putting together a program on ferrous scrap. We will not only discuss what is happening with ferrous scrap prices and availability now, but we will take a longer-term view of scrap and scrap substitutes and what the future holds for supply, costs and projected mill pricing.

The SMU Steel Summit will be the place to see and be seen. All of the key executives involved in the flat rolled and plate steel markets will be there, happy to be out in public for the first time in more than a year. You can learn more about our agenda, speakers, costs to attend 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, John@SteelMarketUpdate.com