Final Thoughts

“The market has changed in that the panic buying, desperation, etc., has ended. But the fundamentals are still intact for this ‘new norm’ going forward. Steel at $2,000/ton isn’t sustainable, but neither is the historical average of $600/ton.”

“Lead times are shrinking, more tons are available. I believe there is a tremendous amount of overbuying in the market.”

“I think we have had a little softening. However, demand is very strong, and with automotive chips starting to come in and energy prices/rig counts rising, I believe Q4 will not drop in pricing anywhere near what many expect.”

“We continue to play whack-a-mole with component shortages, in some cases helping our suppliers source their components, and are increasingly relying on air freight to get critical components here in a timely manner. We’re at 65% of our target output level…. Due to the port situation and logistical challenges in general, we anticipate being in this state of ‘what is going to break next?’ into Q1, if not longer.”

“I see the domestic mills working very closely to maintain as much control as they can on the market supply and pricing. The old days of true competition for tons are pretty much gone. This is not to say that supply and demand is not working as it should, but I feel the domestic mills are more in lock step on maintaining control.”

“Sure, buyers are pushing back, which is normal, but now we get to see if steel mill consolidation means anything.”

“CRU and SMU can continue down their path of leading people to believe steel prices are in for a large downward correction – and maybe it happens – but everyone needs to be cognizant of the continued supply chain disruptions, the impacts they will have on obtaining steel in a timely fashion, and the negative impacts of not having sufficient steel to compensate for these supply-chain disruptions. Not to mention additional supply-chain impacts when automotive obtains sufficient chips to produce more cars.”

“The climate has changed, but it isn’t going to drastically reverse anytime soon. Demand (and outages) will keep this thing frothy/lifty for the foreseeable future.”

Market Yet to Feel Full Impact of Auto Steel

The New York consulting form AlixPartners forecasts the global automotive industry will lose 7.7 million units of production in 2021 at a cost of $210 billion in revenue due to the semiconductor chip shortage. The shortfall of microchips is expected to dog the auto sector well into 2022, if not beyond. Meanwhile, automakers in the U.S. have produced a surplus of high-quality steel that would normally have found its way into automotive stamping plants. Where will this steel end up and how will it impact prices? One steel exec offered the following assessment:

“There’s a growing acknowledgement that the limits on auto production are meaningfully hitting steel consumption. Because mills continued to produce tons for the auto sector despite lower vehicle production, and then filled up storage capacities of the same, it’s very likely we haven’t yet seen the worst of this impact on the steel business. Not only is there nowhere left to store auto-destined tons, there’s also no expectation there will be a notable improvement in vehicle production until mid ’22 or so. It’s looking like the automakers will take extended holiday shutdowns, and Q1 may look a lot like Q4. Improvements won’t kick into gear until Q2 and onward. So, we have an excess amount of inventory in storage now, reduced vehicle production for the next 4-6 months, a surge of imports coming late this year and early next, and new domestic mill capacity coming online to boot. The question is, what will the domestic mills do with the excess supply caused by lower auto demand? It’s doubtful there’s enough non-automotive demand to make up that differential.” And we all know what happens to prices when supply exceeds demand.

Looking ahead, expect more volatility in steel prices. With hot rolled likely to dip below $1,900 per ton soon for the first time since mid-August and anecdotal reports of deals as low as $1,600 a ton, we look for the price range to widen. The average prices reported by SMU could see swings of $50 or more from week to week as the market seeks equilibrium.

Letter to the Editor

Following is a response from one reader to Thursday’s column by Phil Bell, president of the Steel Manufacturers Association:

“I found Mr. Bell’s article regarding Section 232 to be on point on most topics. We all want the domestic industries to be healthy and profitable so they can grow and provide good paying wages to support the American dream. However, even good intentions have unplanned consequences. Domestic steel prices have reached an astronomical level. So much so that domestic steel mills aren’t on the same leveled playing field to other steel-producing countries. I also agree that Section 232  has done what it was intended to do. Some may argue that because of Section 232, the steel mills have behaved in a predatory manner when they are decoupled from the cost-plus model. The other side of record quarterly earnings is the end customers paying the price. We all want to compete on a level playing field.” 

SMU Events

It’s not too late to register for SMU’s Steel Hedging 101 workshop. Instructor Spencer Johnson of StoneX Financial will lead the virtual event, to be held on Nov. 2-3. You can sign up by clicking here.

Thinking about a trip to Florida for the Tampa Steel Conference? Click here to review the full agenda. The live and in-person event will be held on Feb. 14-16, 2022, at Marriott’s Water Street Hotel in Tampa. 

As always, we appreciate your business.

Tim Triplett, SMU Executive Editor, Tim@SteelMarketUpdate.com