Final Thoughts

Hot-rolled coil prices continued to fall – they’re down $25 per ton compared to last week. That’s not a surprise. We adjusted our HRC momentum indicator to lower last week. But the magnitude of the drop wasn’t as steep as I expected.

And other prices are mixed. Cold rolled and Galvalume are down a little. Galvanized prices are up a little.

I personally think we’re past the peak and heading down the other side. But my opinion doesn’t matter. If there is not yet a clear trend for cold rolled and coated products, it’s hard to justify switching the momentum indicators to lower.

What is interesting is that plate prices continue to rise – perhaps on the latest round of mill hikes. And for the first time in about a year, plate prices and hot-rolled coil prices are nearing parity.

So what to make of the current market? If you ask three people, you’ll probably get five different takes on where things are headed. Here are two:

A Roller Coaster

One service center executive told me he could find no spot hot-rolled coil tons for lower than $1,900-1,920 per ton – at least not from most major domestic mills. But he noted an interesting distinction: Prices are not available below those levels assuming you’re ordering for this year.

“The mills are trying to hold up the prices through December,” he said. “The price for January is less, we fully expect it to be.”

But don’t count on it falling hard and fast. If prices fall sharply, some domestic mills have already made it clear that they will take down capacity, the service center exec said.

And it’s not a slam dunk that hot-rolled coil prices will remain on a downward trajectory. The chip shortage – a cover for a number of other material shortages – will probably continue to dog automakers and other manufacturers. But energy demand could come back in a big way should oil prices remain elevated, he said.

“We could go to $70-80 per cwt ($1,400-1,600 per ton) and then go right back up again,” the first service center executive said.

Stairs Up, Elevator Down

Another service center executive said hot-rolled coil could be had for well below $1,900 per ton. And he found it surprising that prices weren’t a lot lower than that.

Service center inventories and import volumes have been rising for months – and more supply coupled with fair demand is not typically a recipe for stable prices. “How have they (mills) held this thing together? I’m just baffled,” he said.

Mill consolidation, fourth-quarter outages and port congestion explain some of it. But only so much.

His speculation was that mills are trying to hold spot prices as high as they can while contract talks are underway. Mills are understandably seeking much more lucrative deals than they did last year – before almost anyone had an inkling of just how high prices would rise.

But he said buyers have soured on producers becoming what he saw as overly aggressive in contract talks. Some are offering a lot less flexibility when it comes to minimum and maximum tonnages as well as only modest discounts – as little as CRU minus 1-1.5%.

The result: A buyer negotiating what was once a 3,000-ton contract might decide that only 1,000 tons will be on contract terms this year. And some buyers have decided to walk away from contract talks entirely, he said.

Leaving everything to the whims of the spot market could prove risky to buyers if costs – for everything from labor to scrap – continue to rise and should inflation become a bigger factor than anticipated. He noted his own labor costs would probably go up because he has told his HR department to do whatever is necessary to get enough people into the company’s plants. Even that isn’t always enough if employees decide manufacturing isn’t for them and walk to greener pastures.

And letting buyers walk to the spot market poses risks to mills too. A mill might refuse to sell contract tons to a buyer seeking CRU minus 3%. But that might seem like a good deal in a few months should mills lose pricing power, the second service center executive said.

“There will be significantly fewer CRU contracts out there. And when you have a hole, what you need to do to fill that hole with a big distributer or tuber is a lot less than CRU minus 2-3%,” he said.

By Michael Cowden, Michael@SteelMarketUpdate.com