Final Thoughts

Momentum and sentiment can and often do support prices over the short term. But they don’t usually have staying power over the longer term without the support of stronger demand.

Let’s stay with the futures market for a moment. Are those pushing hot-rolled coil over $800 per ton financial players or physical market participants? My hunch is that it’s banks and traders pushing futures higher. It’s hard for me to see physical market participants eager to lock in HRC at $800 per ton or more this time of year – and especially this year.

As most of you know, the first quarter is typically a strong one for steel given the usual seasonal factors – restocking ahead of construction season, for example. But the consensus among analysts at the Tampa Steel Conference was that the second half of the year could be a weak one for steel – and especially for construction, which could be harder hit than other segments by higher interest rates.

Will infrastructure help? Yes, but that’s a long-term impact. And it’s more concentrated in rebar and plate than in sheet. Also, it’s hard to see some aspects of the construction market returning to pre-pandemic norms. Yes, many of us have returned to the office. But a lot of us are only going in part of the week. And some of us are still working from home full time. That’s not good news for commercial construction.

What about automotive? No, tech layoffs don’t have a direct impact on steel demand. But those layoffs are more concentrated than most among people willing to pay the ~$50,000 it costs now to buy a new vehicle.

Also, how much spot activity is going on now? We’ve heard anecdotally that deals covering 2-3 months – a sort of hybrid between contract and spot – continue to be placed at discounts to spot numbers. Because they aren’t traditional spot deals, they aren’t necessarily reported to the indices. But who is going to complain about that? Services centers are probably happy to see the indices move higher when they’re getting a nice discount to them.

Is there a case for higher prices in the physical market? Yes, capacity utilization is still low. And I’m curious to see what January inventory levels will be. Because if they’re low – and if new capacity continues to struggle to ramp up – I can see how this rally might continue longer than expected.

That said, we’ve got mills targeting $850-875 per ton hot-rolled coil. What’s next – $900 per ton?! That would be nearly $300 per ton above where we were in November. I’d be more comfortable with gains like that if we saw lead times extending in earnest or an obvious source of growth on the horizon.

Here’s the most cynical take. Perhaps this is mostly about velocity. Mills don’t want prices to come down in a hurry. Does jacking HRC up to $850 per ton or more allow for a more controlled slide downward in 2H?

By Michael Cowden, michael@steelmarketupdate.com