Final Thoughts

We had obvious drivers for the last two big rallies. The snapback in demand in 1H’21 following the initial outbreak of the pandemic in 2020. And then the panic that followed the invasion of Ukraine a year ago.

Just how fast are prices moving up? Several major mills are now seeking $1,000 per ton ($50 per cwt) for hot-rolled coil (HRC) – or just $40 per ton more than where our base price for galvanized product stands today.

The big caveat, of course, is that our current price ranges don’t reflect the full $200 per ton in price increases announced by domestic mills in February alone.

When prices are rising fast – as they did in the first half of 2021 and again last year following Russia’s invasion of Ukraine – it often seemed like one week’s galvanized base price was the next week’s hot-rolled coil price. I didn’t expect to be seeing prices increasing as fast as they did then anytime soon. And yet here we are.

What’s driving it this time? It’s not the pandemic or a new war. Is it inflation, strong demand, limited supply, mill consolidation, or something else? My opinion: It’s little bit of all the above.

On the HARDI webinar I participated in today, for example, multiple participants said it was “full-steam ahead” on demand. They also noted that higher prices at the mill level were taking hold downstream, something echoed in our latest survey results.

One thing caught my attention: One webinar participant noted that his company has seen strong demand for heavy-gauge galvanized from the solar-energy market – perhaps an indication of infrastructure spending beginning to kick in. It will be interesting to see if more companies start to see the impact of government spending as we move deeper into this year.

Participants also noted that inventories are lower now than they were a year ago, something supported by our own service center inventory figures, and that holes could emerge if buyers continue to hold back on restocking.

The consensus on the call was that prices and lead times were both extending, although some said they’d feel more comfortable if they saw lead times moving out further to support prices as high as what domestic mills are now seeking.

On the news side, Cliffs is in the process of restarting a mine and pellet plant on the Mesabi Iron Range in Minnesota. That comes after US Steel said earlier this month that it had restarted a blast furnace at Mon Valley Works in western Pennsylvania in late January. Those are not the kind of actions mills take if they think an uptick in demand is only temporary.

What about that “something else” that might be supporting higher prices?

One service center source on the HARDI webinar said he’d heard rumblings of potential trade action against Mexico, something we wrote about in today’s issue. The likely target there appears to be conduit, which is made from welded sheet. He also said he’d heard coated material from East Asia might have popped up on the domestic mill trade case radar. That’s one worth watching too.

I’m less skeptical of demand and about this rally extending now than I was a few weeks ago. But I do wonder, as was pointed out on the HARDI webinar, about the dynamics of this latest rally. It’s not unusual to see steady price gains for 2-3 months – as we’ve seen from December through February. Typically, the market would then plateau and come down again. If the latest price increases hold, what we’ll see instead is something a little unusual absent a powerful external catalyst. Prices moving up steadily over a few months and then, instead of plateauing, exploding higher.

To be clear, I’m not saying that won’t happen. There was a lot of talk about a “new normal” or a “new paradigm” this time last year. Most of you recall the reasons why. Consolidation would allow US mills to keep finished steel prices higher. Producers would be motivated to keep selling prices high in part because a sharp increase in electric-arc furnace (EAF) sheet mill capacity would keep prime scrap costs structurally higher. And the US sheet market is a lot more protected from imports than it was a decade ago.

Is this massive increase in prices that mills are seeking the result of that new normal finally emerging, albeit on a lag? That’s possible.

I think it’s also important to keep an eye on some of the realities we’re more familiar with too. That imports could come in larger volumes in late spring or summer and send prices back down again, for example. Or that new capacity might, as it finally ramps up, overshoot demand.

As for that last point, note that we’re adding capacity not just when it comes to hot-rolled coil but also on the galvanized front.

We’ve seen HRC prices move up sharply lately, but galvanized prices less so. I’m not going to make any sweeping calls based on a week in which prices were unsettled because we’re still waiting on the impact of mill price hikes to flow through. It’s possible we’ll see galvanized price jump up next week. That said, I think that spread between HRC and galv will be worth watching in the months ahead.

By Michael Cowden, michael@steelmarketupdate.com