Final Thoughts

Dull or recency bias showing?

How do things look on the steel side? “Boring and dull” is how FGM Founder and CEO Jeremy Flack described the steel market during SMU’s Community Chat on Wednesday. And take a look at “Market Chatter” – one of our most-read sections. Not a lot of enthusiasm there, either.

Most respondents to our survey reported that inventory was moving more slowly than a year ago. They also said demand was stable or declining. Few said it was improving.

When it comes to pricing, most said prices were stable. Some expected modest declines, others modest gains. None predicted a price spike.

Here are a few quotes from ‘Market Chatter’ that caught my attention:

• “They’re “firm-ish”. They seem to be staying at these current levels, but I would argue they aren’t on solid footing. The fall outages really didn’t result in pricing spiking upward as most folks thought.”
• “All I hear from OEMs, SSCs and automotive folks is how poor demand is. When we go 0-3 in those sectors, we’re in trouble.”
• “How does the rhetoric around ‘protectionism’ impact the near/friend-shoring in Mexico? And could it cause a whipsaw effect in the US manufacturing space?”

Why those ones? For starters, it’s not just “meh” when it comes to what people are saying. We also see that in our survey data. (See slide 18 here.)

Most people expect prices to be roughly where they are now or a little higher two months from now. (SMU is at $705 per short ton (st) on average when it comes to hot-rolled coil.)

Few (13%) think we’ll pop over $800/st by then. And even fewer (6%) think we’ll fall into the low $600s, as we did in July. Flack made a good point that this might reflect the “recency bias” that humans, including us in steel, tend toward. We pretty much expect that the next 90 days will look more or less like the last 90 days.

It’s usually a safe bet that tomorrow will look more or less like today. But given current events – and that we have an election in just over 30 days – maybe less so now.

Some ‘what ifs’?

Take the ports strike. I’ve had some people tell me that breakbulk shouldn’t be impacted. That means most steel should be OK. Except perhaps for some galv coming in via containers. But others tell me that the longer the strike drags on, the more potential for other unions to refuse to cross picket lines, which could mean disruptions for breakbulk as well.

Even if breakbulk isn’t impacted, how long is it before imports of auto parts, which do come in containers, start to slow automotive assembly lines? As Steve Miller notes in a good article for Recycled Metals Update (RMU), exports of containerized scrap could grind to a halt. What happens to that material? Does it flow inland instead and pressure prices in the Midwest or Southeast?

It’s hard to handicap the impact of strike without know how long it will last. And that might hinge on whether President Joe Biden unleashes the Taft-Hartley Act to break it. Taft-Hartley was invoked by President George W. Bush in 2002 to end a West Coast ports strike. What wins out in that calculation for Biden now, the potential economic damage of a prolonged strike or the potential loss of union support for Democrats just before the election?

The question about near/friend-shoring with Mexico is another one that’s hard to answer. USMCA, which replaced NAFTA, was negotiated under the first Trump administration. The idea at the time seemed to be what I’ll call “Fortress North America.”

And you could make the case that billions in investments were made accordingly. Ternium invested in a new mill, and new melt capacity, in Mexico. SDI built a new mill in Sinton, Texas, with part of the justification being to serve a growing and steel-intensive Mexican market. Other EAFs have also done well in Mexico.

And yet some of those same companies have joined the coated trade case against Mexico. I don’t think anyone was shocked to see Vietnam and some overseas sources of coated products targeted. But it was a little surprising to see Mexico (and Canada) among those hit with high alleged dumping margins.

Is that an indicator of what’s to come for US trade policy more broadly speaking? Could a second Trump administration or a Harris administration – to steal a talking point from Cleveland-Cliffs’ CEO Lourenco Goncalves – really take the ‘M’ out of USMCA? Or, for that matter, would Congress really reinstate Section 232 tariffs on Mexico?

It’s hard to answer these questions until we know who will be in the White House on Inauguration Day. And given how closely knit North American supply chains are – not just in steel and manufacturing but also in agriculture and other industries – how would that work in practice?

Speaking of letters by US lawmakers, we now have another related to steel. Sen. Elizabeth Warren and Sen. Sherrod Brown are against the acquisition of U.S. Steel by Nippon Steel. They cite the potential $72-million payout to David Burritt, the CEO of the Pittsburgh-based steelmaker, a criticism echoed by the United Steelworkers (USW) union.

Yes, but what happens to the workers at U.S. Steel if the deal doesn’t go through? A “golden parachute” like that might not be fair. But I think most people in the industry (OK, probably not Cliffs and definitely not the USW) are in favor of the deal. Is there a plan B if it doesn’t happen?

Basically, all of these stances – whether it’s the strike, trade policy, or the USS-Nippon deal – might make for good sound bites as more votes are cast. (Early voting is already underway in many states.) But is anyone thinking about the day after?

Let me know if you have any thoughts. And in the meantime, all of us here at SMU truly appreciate your continued support.