Final Thoughts

Some market participants think we’re already past the peak, coming down the other side of the mountain and just haven’t realized it yet. Others think prices won’t correct until early 2022. Note a difference: For the first time in a long time, the consensus view is that prices are headed downward.

Why? Well, it’s hard to ignore prime scrap prices falling $50 per gross ton, the biggest month-over-month decline in years. Also, imports. Hot-rolled coil is available from approximately $1,420-1,450 per ton ($71.00-$72.50 per cwt) for late fourth quarter 2021 or early first quarter 2022 depending on the country of origin, according to market participants.

SMU’s HRC price stands $1,955 per ton, or $520 per ton higher than imports. And some mills are offering $2,000 per ton for the few spot HRC tons they have, which brings that gap up to nearly $600 per ton. That means imports are, at least when it comes to price, wildly attractive even once you factor in Section 232 tariffs of 25%. (Oh, and by the way, those tariffs might not be around much longer on Europe.)

Also, we’re not talking just about the usual stuff coming up on rail from Mexico or on barges across the Great Lakes from Canada. Although Ternium – thanks in part to its new hot strip mill outside of Monterrey, Mexico – is certainly helping to fill some of the gaps left by widespread domestic mill outages, sources noted.

There are offers from South Korea, which is exempt from Section 232 tariffs, and other traditional import suppliers such as Turkey. There are also offers from places you don’t see every day – Vietnam, North Africa and Serbia, for example. And that’s just when it comes to hot rolled. You want cold-rolled or galv? Add Pakistan, Russia, Brazil and Japan into the mix. It’s all coming to America.

And it’s not like imports weren’t high to begin with. The U.S. has imported (or was licensed to import) more than one million metric tonnes – or more than 1.1 million short tons – in each of the last three months, according to Commerce Department figures. It’s too early to say what September will bring. But current volumes are more than double what we saw in January. And they’re substantially higher than the 800,000 tonnes that arrived in January 2020. Recall early Q1 ’20 was a period when steel demand was rebounding and it seemed like North America might dodge the pandemic. Even by that standard, import volumes now are really high.

You could make the case that I’m doing what the domestic industry too often does – blaming imports for everything. And that would be a mistake. Because increasing imports are often a sign of increasing demand, and that is what we saw in the first half of this year as prices surged higher on tight supplies.

But the problem is not those first cargoes. It’s the last ones, the ones that come in after prices have turned downward and demand has fallen. Could that be what we see late this year or early next year as imports, ordered when ~$1,400 seemed like a great deal, arrive when that isn’t such a good price and tons aren’t so hard to come by. That’s the kind of stuff that can lead to trade cases. Recall 2015-17, anyone? That’s when we had huge trade cases filed on hot-rolled, cold-rolled and coated products as well as plate.

Back to the question of timing. Things slowed down, as they usually do, in July and August, but some market participants report that activity has increased notably in September. In other words, normal seasonality still applies even in this unprecedented market. That would be fine if lead times were their usual 3-6 weeks. But they’re still, on average, extended. Which means steel ordered now might not arrive until mid-November, or just when the market typically cycles down ahead of Thanksgiving, Christmas and New Year’s holidays.

Some of you will be quick to point out that imports slated to arrive in the fourth quarter might not come in until January, and that material slated to arrive in January might not hit ports until February. There is a usual suspect to blame for that one: port congestion. And it’s not just the headlines you see about California, where dozens of ships are stranded along the coast. You’ve got a similar, if less severe, situation playing out at East Coast ports – and a lot of ports abroad too.

Maybe the delays incurred because of such port congestion, and sky-rocketing shipping rates, will limit import volumes and delay their arrival in the U.S. – thereby extending the current price cycle a little longer. Here’s the problem with that. Unprecedented delays as well as shortages of things and people aren’t confined to just ports.

We’ve written a lot about the chip shortage impacting the automotive industry. And while we write less about it, that’s also a big problem for the appliance industry, another key end market for steel. And the shortages aren’t confined to just chips. Everything from adhesives to conveyor belts is in short supply. And, perhaps more importantly, widespread labor shortages have some companies fearing it will be difficult to get product, even if they can make it, out the door to customers. And if you can’t deliver what you make, do you need all that steel you thought you would?

A lot of ink has been spilled about excess capacity, including in these pages. But what if the thing that finally turns this market the other way is not enough capacity of just about everything else – and especially of skilled workers.

And how do you get people back to work when wages alone might not be enough to convince them to go job hunting? After all, how can you go back to work if you’ve got COVID-19, you’re caring for someone with COVID-19, or you’re quarantining because of exposure to someone in your household? What does a worker do if their kids have been sent home because of an outbreak at school? Figuring out how to address such issues – making sure you have enough people – might be just as important as making sure you have enough steel.

By Michael Cowden, Michael@SteelMarketUpdate.com