What if steel prices don’t return to “normal”?

What if steel prices don’t return to “normal”?

Expected steelmaking capacity not available anytime soon
If you have been keeping a close watch out for the inevitable fall in steel prices, you’ve probably heard this phrase quite often in recent weeks: “Look what happened in lumber.”

In case you’ve been living under a rock (or tree), lumber prices fell by more than 40% in June, their biggest monthly drop on record. What if steel prices fell by the same amount over the same period? Steel Market Update’s hot-rolled coil (HRC) prices stood at $1,770/ton ($88.50/cwt) as of July 9. A similarly rapid descent in steel would mean $1,060/ton ($53/cwt) HRC.

Anything is possible. No one expected in mid-July of 2020 that HRC prices—$475/ton at the time—would more than triple within 12 months. Here’s why that kind of drop is improbable in steel.

On the domestic scene, new capacity continues to be pushed back. The next slug of new HRC capacity was supposed to come from Steel Dynamics Inc.’s new mill in Sinton, Texas, in late summer. But severe weather and flooding along the Gulf Coast have pushed that project out to the fourth quarter. And other new capacity projects—including expansions at North Star BlueScope in Delta, Ohio, and Nucor Gallatin in Ghent, Ky.—aren’t coming online any sooner.

On the international front, Russia is taxing exports. That might lead to a short-term dip in prices as exporters of pig iron and slabs rush to beat the imposition of the tax—and as Brazilian suppliers of the same product have to contend with lower prices from a competitor. (Keep in mind, Russia can’t export huge amounts of finished steel to the U.S. because of existing duties.) But longer term, the tax could reduce volumes from an important supplier to the global steel market. And less supply typically means higher prices.

It’s a similar story in China, which has eliminated a tax rebate on steel exports and appears serious about reducing capacity. As is the case with Russia, China exports little steel directly to the U.S. because of prohibitive antidumping/countervailing duty orders—more than 500% in the case of cold-rolled coil, for example. But it is a big supplier to other regions, such as Southeast Asia, which do supply the U.S. So, reduced supply from China will have an indirect impact here as well.

That’s macro stuff. How about the basic stuff that all of us can relate to?

It’s important to remember that steel and wood have some big differences. Cranking up an idled sawmill is a lot easier (and less capital-intensive) than starting up a blast furnace that’s been mothballed for years. Case in point: Steel prices are at their highest ever, and that still wasn’t enough to keep Cleveland-Cliffs from deciding to raze its Ashland Works mill.

Also, let’s remember that the future is not a carbon copy of the past. It rhymes, but it does not repeat. Those who learned to drive in the 1990s might have paid $1 or so a gallon to fill up the car. When gas hit $2/gal., they likely had sticker shock.

Gas prices dipped a little below $2/gal. in the aftermath of the 2008 financial crisis. But about two years later, prices were back above $4/gal.—their precrisis high—and then some. It took a global pandemic to get them briefly below $2/gal. again. Gas prices in the last two months, in contrast, have been solidly above $3/gal., according to U.S. Energy Information Administration data. It’s a good bet that number will increase given how many cars now are hitting the road for family road trips this summer.Also, oil prices, which briefly went negative last year, are at around $75/ barrel now. And $100/barrel for oil doesn’t sound crazy, especially as more and more people resume driving and flying around the country again. Yes, new COVID variants are a real concern. But if current trends hold, and if oil hits $100/barrel, demand for oil country tubular goods could shoot up as OCTG inventories drop. Restocking would create more demand for coil, and demand grows

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If there is stuff that hasn’t shot up in price yet, it probably will. It’s just a matter of time.

Which raises the question: Will steel prices ever return to “normal” levels? Let’s bring it back to gas prices. Those who remember $1 to $2/gal. gas have to come to terms that $2 to $3/gal. is where gas prices are now—barring another pandemic, of course. Gas at $1/gal. isn’t coming back. Similarly, consumers of steel got used to $500/ton to $700/ton HRC prices. Sure, HRC prices around $1,800/ton probably won’t last forever, but maybe steel’s next generation is going to think that coil at $900/ton to $1,100/ton is perfectly normal.

Steel Buyers’ Sentiment
Like steel prices, steel buyers’ sentiment, as measured by SMU, remains at unusually lofty levels. Industry sentiment hasn’t changed significantly in the past three months. Current sentiment has averaged a reading of +75 and future sentiment an average of +65, plus or minus a few points, since late April as the market enjoys the rush of record-high steel prices and profits.

SMU asks steel buyers every two weeks how they view their company’s chances for success in the current environment and how they view their prospects three to six months in the future. Their relative optimism or pessimism offers insights into steel demand and capital spending. SMU’s Current Sentiment Index of +75 (see Figure 1) and Future Sentiment Index of +68 (see Figure 2) the week of July 5 showed the huge recovery from the same time last year when the respective sentiment readings were a lowly +42 and +52 with the market in the grips of the COVID pandemic.

The lack of much movement in SMU’s sentiment readings, which are near their all-time highs, suggests they have probably peaked. The next significant change we see will mostly likely be in a downward direction as the market reacts to the correction in steel prices that the experts say is coming. No sign of that yet in steel buyers’ buoyant attitudes, however.

Steel Market Update Events
It’s not too late to register for SMU’s Steel Summit Conference in Atlanta Aug. 23-25. The live, in-person event has an online “virtual” option for those unable to travel.