Final Thoughts

Spot Market Dynamics

I’ve heard from buyers in the Midwest that discounts for large-volume orders negotiated by an integrated producer in/around Steel Summit continue to keep a lid on prices. Those deals might have been intended to fill up mills with volume, push out lead times, and set the stage for price hikes. As we’ve noted before, that strategy might have slowed the pace of declines – but it didn’t succeed in changing the direction of the market.

Now we’ve got this question kicking around the market. Let’s say those deals were negotiated with a handful of large service centers – companies capable of placing orders of 50,000 – 100,000 tons. And let’s say those tons, perhaps so they could be reported as contract deals rather than spot deals, were stretched out over 2-3 months. What now?

The music on demand hasn’t stopped. But it is not as strong as some had hoped, which means those big buyers probably don’t have to come back to the market again for significant tons.

Let’s talk round numbers. Let’s say a mill sold a big service center 100,000 tons, and let’s say that service center is effectively out of the market for big orders for the balance of the year. If you need to move tons again now, what do you do? Do you sell to five service centers capable of buying 20,000 tons each, or 10 capable of 10,000 tons each? You see where I’m going with this – at what point does that discounted price become a repeatable, reportable spot deal?

A special price today has a way of becoming the prevailing price tomorrow. So will we start seeing more deals in the $600s per ton popping up in the traditionally defined spot market and the various indices? Or will mills manage to hold the line in the $700s per ton? If they did, it would be an accomplishment considering that discipline is a lot harder to maintain in a sideways or downward market.

Another issue is that new EAF capacity ramping up and trying to “buy” its way into the market. That’s not meant in a pejorative sense. It’s not uncommon when a mill is still dealing with the usual growing pains. The result: Let’s say an established EAF producer is at ~$800 per ton. A newer producer might be at ~$750 per ton. That dynamic also appears to be putting a cap on prices.

Contract Market Dynamics

Now let’s turn our attention to contracts. In a very basic sense, the dynamic seems to be this: Why lock in a price today when prices might be lower tomorrow? 

We’ve got new capacity ramping up. It appears that it’s more than enough to meet current demand. And so why wouldn’t the price continue to slip?

Let’s say contract season usually begins around Steel Summit in August. Last year most deals were wrapped up by Halloween. Lead times were longer, prices were still high, and mills had a strong hand to play.

That’s not the case this year. Lead times are short. Buyers think they can afford to wait. So are we looking at mid-November, or are talks going to drag on longer than that?

One thing I’ve noticed is that people are remembering the more generous discounts they received to spot prices two years ago. Let’s say a mill is offering CRU minus 2.5-3.5% now. Some buyers think they can do better than that – maybe something more akin to the CRU minus 5-6% they got back in the fall of 2020.

That’s a considerable gap between the two sides that’s unlikely to close before the end of October.

There is also a lot that could change between now and then.

The USS-USW Wildcard

One thing to keep a close eye on in the meantime is contract talks between US Steel and the United Steelworkers (USW) union. I know some of you think it’s only a matter of time before the two sides strike a deal. And there is precedent for that.

We saw the USW and mills in Canada heat up the rhetoric. Negotiations stretched well past the expiration of prior contracts. And at times the unions came very close to striking. But in the end, new deals were reached.

A better precedent in the US might be contract talks in 2018. We saw US Steel strike a deal with the USW in mid-October of that year. Despite concerns about a strike lockout at ArcelorMittal USA, a deal there was reached just a few weeks later.

After all, how do you afford a strike or lockout if one would effectively hand business to your competitor? And how do you conclude price contract negotiations when you’re not sure whether there will be a workforce in place to make the steel you intend to sell?

It’s worth asking whether that logic still applies now. Could US Steel get by with management and replacement workers (aka scabs)? Does the company have enough raw materials socked away to do so? I don’t know the answers to those questions.

But we do know things are a lot different at US Steel now compared to 2018. The steelmaker has since permanently idled the blast furnaces at its Great Lakes Works in Ecorse, Mich. It is also running only one furnace each at its Mon Valley Works in western Pennsylvania and at its Granite City Works in southern Illinois. (That’s not to mention the No. 8 furnace at Gary Works, which has been indefinitely idled.)

In short, US Steel has a smaller USW-represented integrated footprint than it used to have. It also has Big River Steel, which it acquired in 2021 and which has a hot rolling capacity of 3.3 million tons per year. Big River itself is a sticking point, especially with money and equipment that had been slated for union-represented Mon Valley being redeployed to the non-union Arkansas EAF.

The other thing that strikes me is just how testy the rhetoric has gotten from the USW side. I try not to read too much into that stuff. Talk is cheap. What matters is when the logistics of a strike or lockout start to kick in – things like strike votes. I was told once that negotiators on the two sides would agree to the terrible stuff they were going to say about each other in the newspaper the next day. I don’t think what we saw in Minnesota was that.

All of this matters because a new labor deal could cause prices to swoon whereas a strike or lockout could send them surging upward. In short, the potential end of the price stability we’ve seen since mid/late August.

Community Chat

Do you want to know how futures markets might react to either a new deal or a strike or lockout at US Steel? Tune into the next SMU Community Chat with David Feldstein, president of Rock Trading Advisors, on Wednesday, Oct. 12, at 11 am ET. You can register here.

Steel 101

We still have a few spots left for our in-person Steel 101 training on Oct. 19-20 in Corpus Christi, Texas. Why Corpus? Because it’s the nearest city to Steel Dynamics Inc.’s new EAF sheet mill in Sinton, Texas, which we’ll tour as part of Steel 101. Don’t miss out, register here.

As always, we appreciate your business.

By Michael Cowden, Michael@SteelMarketUpdate.com