Final Thoughts

 That hike was met with doubt. Among the initial reactions:

1. It was a Hail Mary attempt to stop prices from falling
2. Other mills wouldn’t follow
3. U. S. Steel, focused primarily on contract business (notably on the automotive side), didn’t have many spot tons to sell anyway

Those positing No. 2 noted that price increases sometimes backfire. The most recent example was a price hike announced by Cleveland-Cliffs in early April. It unofficially marked the end of the Q1 price rally when other mills, realizing the market had turned, didn’t follow Cliffs up $100/ton ($5/cwt) or try to enforce Cliff’s target minimum base price of $1,300/ton for HRC. Our own prices peaked at $140 per ton below that level. And before long, Cliffs was among the domestic mills offering big discounts, especially to larger buyers.

That second hypothesis, however, proved wrong when Nucor followed U. S. Steel up $50 per ton and went a step further in announcing a new, minimum base price of $900 per ton for HRC. Then, talk of whether the increase might stop the bleeding, or even partially succeed, turned more serious.

Let’s focus for a moment on the targeted base price: $900 per ton. Our average HRC price is above that level now. But bigger buyers have been in the $800s per ton for a while. Could the coordinated increase send a message to stop that discounting – i.e., at least slow the bleeding in prices?

To explore that question and others related to it, let’s go through a few reasons why the latest increases might stick and some reasons why they might not.

Why It Won’t Stick

1. US prices remain well above prices in the rest of the world. If US mills try to hold the line at $900/ton, it will encourage more import competition. Also, international prices might continue to drift lower with mounting economic troubles in Europe and questions around the effectiveness of stimulus in China.
2. New domestic capacity continues to ramp. Let’s take scrap prices and add a generous $300 per ton for (inflated) raw material, labor, and energy costs as well as for profits. With busheling at $440-480 per gross ton, US mills would still be profitable well below $900 per short ton. Why would new capacity trying to gain a foothold in the market hesitate to take an order (and associated profits) below $900/ton?
3. The double whammy of higher interest rates and tighter lending standards is still with us. Plus, the job market remains strong, which means the Fed might continue to raise rates.
4. Look at our price increase calendar and rewind back to August 2022. Nucor announced a $50/ton price increase in early August. Cliffs went up $75/ton in late August, a move that NLMK USA followed. Did sheet prices go up in September? No. HRC prices went from $785/ton in late August to $775/ton in late September. (To be fair, the price hikes did slow the declines we’d seen over the summer of 2022, a period that saw week-over-week declines of $35-90 per ton.)

Why It Might Stick

1. While demand has moderated, most of you tell us that activity is still good. Seventy-six percent of respondents to our last survey said overall demand was stable or improving. Also, nearly 80% of you told us you met or exceeded forecast in May. True, that’s a bit lower than the ~85-90% we’d seen from Jan.- April. But it’s not the kind of reading indicative of a broad-based manufacturing slowdown.
2. More than 80% of service centers in our last survey said they were lowering prices. That’s what our founder, John Packard, called “capitulation”. That’s when service centers are just as tired as mills of watching prices (and inventory values) decline, and so are willing to support a mill price increase.
3. Service centers had 2.33 months’ supply of sheet in May, according to SMU’s latest service center inventory and shipment figures. That’s down from 2.69 months’ supply in April, down from 2.60 months’ supply in May ’22, and roughly on par with 2.27 months’ supply in May ‘21. I’m not suggesting that prices will explode higher, as they did in 1H’21. Hot-rolled lead times were nearly 11 weeks in May 2021, or longer than service center inventories. But with demand still intact and inventories not high, might buyers now think twice about remaining on the sidelines?
4. We keep predicting that a recession is right around the corner. But the slowdown hasn’t materialized yet. Is it possible the market is repeating the mistake of Q4, when expectations of a recession in early 2023 didn’t materialize and people hadn’t stocked adequately to absorb an unexpected outage? (AHMSA in that case.)

Those are just a few thoughts off the top of my head. Let me know what you’re seeing out there at the email below!

SMU Steel Summit

We’re about two months away from our flagship Steel Summit conference. We have a strong agenda, more than 750 people have already registered, and few of our discounted room blocks are left.

Don’t let that discourage you. It might be hard to find discounted rooms on the campus of the Georgia International Convention Center (GICC). But there are still plenty of rooms available in the area around Hartsfield-Jackson airport, which just a few minutes’ drive away from the GICC.

You can learn more about the event and register here.

By Michael Cowden, michael@steelmarketupdate.com