Final Thoughts
Final Thoughts
Written by John Packard
June 22, 2021
A Whimper or a Bang…?
An interesting comment was made by one of the wholesalers on this morning’s HARDI galvanized steel conference call. I am paraphrasing here, but essentially the wholesaler was making the point that even when the mills catch up, the underlying demand is still there. From this executive’s perspective, as long as demand remains intact, prices may roll over, but probably would not crater.
As we have seen, analysts from the financial markets and even our parent company are forecasting prices to undergo a dramatic correction in the coming months (between now and the end of the year). By dramatic, the analysts are discussing benchmark hot rolled below $1,000 per ton (in the case of Timna Tanners, she is looking at $800 per ton by the end of the year).
Many questions that I receive now are about how far down and how quickly steel prices can fall.
“We are in uncharted waters,” is what one service center executive told me this afternoon. After all, who ever thought back in August 2020 when we had hot rolled prices averaging $440 per ton that we would be above $1,700 today?
Many issues got us to where we are today. A pandemic that interrupted supply. A “V” shaped recovery in demand no one expected. Falling inventories at both service centers and end users. Then we had disruptions of supply – the NLMK strike, numerous outages, and the impact of Section 232 tariffs (along with AD/CVD duties), which impacted foreign steel supply.
Last week, Steel Market Update reported service center flat rolled inventories as growing for the first time in many months. Inventories are no where near “balanced,” but they are better than they have been for most companies. (Our HARDI galvanized buyers are still on allocation and their inventories are tight).
In our analysis of hot rolled, we found an interesting split in pricing between the integrated steel mills and the EAF mills (whose books are open). We are seeing a wide range in our pricing from top to bottom. When prices are pushing higher, we tend to see that range tightening and not as wide as what we are reporting over the past couple of weeks.
The market will top out, and I believe the market will see flat rolled steel prices peak within the next 30 to 60 days.
Then the question is – what’s next? What will keep prices from sinking like steel in a lake?
The mills are making huge profits with the spreads they currently enjoy in both scrap and iron ore. If prices were to drop a quick $500 per ton, the domestic mills would still be making record profits.
The idea of a “disciplined” approach to pricing by the domestic steel mills is interesting, but probably not realistic. I have heard one mill CEO speak about how much cheaper it is to run their mill full versus pulling back in an effort to keep prices artificially high.
The market is where it is today due to a lack of supply and strong demand. This will change as more supply becomes available (foreign and domestic supply) and demand stabilizes or declines for seasonal or other factors. Inventories will grow over the coming months, and there will be a time when steel buyers begin to sit on their hands.
I do not forecast steel prices. It is a fool’s errand. Volatility is here to stay, and everyone needs to keep their eyes glued to demand, lead times, price offers and availability of steel both on contracts and in the spot market, as well as inventories.
Watching the steel mills, we need to be aware of maintenance schedules coming up in fourth-quarter 2021, and we need to watch the progress of SDI Texas, North Star BlueScope (which I don’t think will be a player until first-quarter 2022), and the negotiations on Section 232 with Europe. We also need to follow scrap prices.
Two recommendations that I have for buyers and sellers of steel:
• Investigate hedging your price risk. Click here to see what workshops SMU has on the subject.
• Come join us in Atlanta for the 2021 SMU Steel Summit Conference (Aug. 23-25) when all these topics will be discussed and debated. Click here to learn more about our conference (this year we will have both a live and virtual option).
I anticipate the ride down in pricing is going to be as crazy as the ride up.
There is a reason why I continue to love working in this business… It is because every day has a new challenge/new opportunity….
As always, your business is truly appreciated by all of us here at Steel Market Update.
John Packard, President & CEO, John@SteelMarketUpdate.com
John Packard
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