Final Thoughts

Instead, China is imposing lockdowns again. So much for that hypothesis. Meanwhile, recession concerns are mounting in the US. Things are already bad in Europe. You get the picture. If you’re looking for gloom and doom, there is no shortage of it.

Futures prices are also down sharply in recent days. That said, it’s important to remember that futures prices don’t predict the future. … But I digress.

My inner contrarian, however, reminds me that whenever everyone says that prices have nowhere to go but down is usually when they start coming back. I’m not in the forecasting business, so I’m not saying that’s what’s going to happen. I just want to present a scenario that I think is at least worth thinking about.

Prices have been falling since late April. We have since mid-May seen in our surveys a steady increase in the number of people reporting themselves as more pessimistic for the second half of the year. Last we checked, two weeks ago, it was 40% who said they were more pessimistic. I’m curious to see what the figure is when we release our next full survey results on Friday.

With prices and sentiment falling, more people are also reporting themselves as being on the sidelines – assuming that whatever the price is this week, next week will be lower. And since mid/late April, that reasoning has arguably served them well.

The issue I see is that most people also continue to report stable demand. That might not remain the case if the economy does indeed tip into recession. But let’s assume, for the sake of argument, that demand does remain roughly stable.

People aren’t buying what they usually do in anticipation of prices going lower. That means at some point they will have to go back into the market and buy more than they usually do. And let’s also assume that it’s not just a few companies that aren’t buying what they usually do but a lot of them. (It’s not called a buyer’s strike for nothing.)

I wrote at the beginning of the article about some very big headwinds to prices. But if we’ve learned anything over the last 18 months it’s that things don’t always go as planned. What are the catalysts for higher prices: a political crisis abroad, a big unplanned outage at home, a labor dispute (recall contract negotiations with the USW are underway), or something we haven’t even thought of?

The point is, the conditions are already in place for lead times to kick out and for prices to shoot up if something unexpected happens. That’s what happens when no one is buying what they need now, and if everyone waits until there is a clear signal that prices are at a bottom to jump back into the market. Remember, too, that when prices are falling, people aren’t just holding back from buying from local mills, they’re often holding off from buying imports too. Which means if we do hit a bottom sooner than expected, there might not be many options besides local mills, which would swing pricing power back in their favor.

And here is a silver lining: We saw HRC prices fall $90 per ton last week. That was the biggest week-over-week drop since before the Ukraine war. Prices were down $60 per ton this week. A week doesn’t mark a trend. But, again, it’s at least worth considering whether the biggest declines are already in the rearview mirror. My bigger question is this: Why is everyone happy to buy steel at $1,200 per ton when the price is going up but afraid to place an order at $1,000 per ton or so when the price is going down? Buying high is a risk. Trying to time the bottom is too.

By Michael Cowden, Michael@SteelMarketUpdate.com