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Steel prices look to be creeping up in the near term

Reductions in imports, domestic supplies play a part

Figure 1. Increasing lead times at the mills represent growing demand for their steel products.

It is mid-June as I write this, my first column for The FABRICATOR. The date is important to remember because the steel industry, especially the flat-rolled steel industry, is quite fluid, and demand as well as pricing can change direction very quickly.

We saw this happen in early December 2015 when the domestic mills were able to announce and collect their first of a series of flat-rolled steel price increases. The result of that action was to create the current strong price cycle taking benchmark hot-rolled prices from a low of $360 per ton ($18/cwt) in early December to its current cycle high.

Based on the “Steel Market Update” pricing index as of this writing, June flat-rolled steel base prices on spot purchases (not contract) have reached an average of $635/ton ($31.75/cwt) on benchmark hot-rolled steel, $830/ton ($41.50/cwt) for cold-rolled coil, and $840/ton ($42/cwt) on galvanized and Galvalume steels. Remember, these are base prices to which you need to add any appropriate extras in order to get the “average” FOB Midwest, USA steel mill price.

Flat-rolled steel prices appear to have peaked for the moment. The last two weeks have seen modest price movement as stability, at least temporary stability, has returned to the flat-rolled steel spot markets.

“Steel Market Update”’s expectation is for the domestic (U.S. and Canadian) steel mills to continue to limit steel supply. This is being accomplished through the idling of the U.S. Steel steelmaking operations at Granite City Works in Illinois, AK Steel’s idling of its steelmaking operations at Ashland Works in Kentucky, and the permanent closure of the blast furnace and basic oxygen furnace at U.S. Steel Fairfield Works in Alabama.

It is not just the idling of steelmaking operations at these three mills that has created a tight supply situation. Beginning in June 2015, the U.S. steel mills began filing antidumping and countervailing duty trade cases against foreign steel being exported to the U.S. from a large number of countries. One of the most mentioned offenders (by the steel mills) was China, and the aim of the steel mills was to block exports of cold-rolled and coated steels from entering the U.S. from China. (Hot-rolled was already banned from a previous ruling.)

In summer 2015, the U.S. steel mills received help from the U.S. Congress, which made changes in the laws and how “injury” was to be determined in these kinds of trade cases. Congress also made it easier to file future cases, which can be quite costly for foreign countries and steel mills to defend.

So far U.S. Department of Commerce rulings have been made in favor of the domestic steel industry, and most of the foreign countries mentioned in the trade suits (including China) have been financially blocked (due to potentially high duties) from sending steel into the U.S. The net result has been a reduction of steel imports, which went from approximately 32.2 percent of apparent steel supply in April 2015 to 23.7 percent in April of this year. Much of the tonnage reduction is coming from lower import volumes of hot-rolled, cold-rolled, and corrosion-resistant steels. As a result, the domestic steel mills are picking up production and shipments, which affects lead times and ultimately steel prices.

“Steel Market Update” also has seen service center inventories drop from an excess of well over 1 million tons to a more balanced +46,000 tons based on our last analysis. (Service Center Inventory Excess/Deficit Analysis is a proprietary product of “Steel Market Update.”) Tighter steel inventories create an environment where steel distributors need to react to both their inventory needs as well as the longer lead times at their domestic steel mill suppliers. The result is a Catch-22: The more the distributors buy, the longer the lead times become, which increases their need to buy further out.

Prices on the Rise

What does this all mean to manufacturing companies located in the U.S. and Canada? For those who are buying flat-rolled steels on a spot basis, you already are aware that prices have risen dramatically since early December 2015. However, those of you who are tied to contract pricing with your mill or service center suppliers are about to see a major price jump in your pricing from second to third quarter. How large an adjustment will depend on what formula you and your suppliers are using to go from the second to third quarter. To give you some idea of what to possibly expect, the “Steel Market Update” hot-rolled average price was $440/ton ($22/cwt) as of March 29. Since then our HRC number has risen by $195/ton ($9.75/cwt), and we are not yet at the end of June 2016.

As of the middle of June, “Steel Market Update” has its Price Momentum Indicator pointing toward a continuation of the higher-price trend. However, as I write this article, we are carefully reviewing all of the factors that go into our pricing forecast. We are seeing lower prices coming out of China. Even though the country is blocked from doing business in the U.S., it does have an impact on other countries and their ability (or need) to export steel. A good example is Vietnam, which has become a much larger exporter to the U.S., using Chinese hot bands and then converting them to cold-rolled and coated products for export to the U.S.

We also are carefully watching ferrous scrap prices which, until June, had been moving higher, supporting higher steel prices. Ferrous scrap is the main ingredient steel mills use to make new steel.

This month we have seen prime grades remain the same, while obsolete and cut grades (like shredded scrap) have dropped anywhere from $10 to $60/gross ton depending on product and location. If scrap continues to drop, which is an unknown at this point, flat-rolled steel pricing pressures could be evident in the next few months.

From our perspective, the key factor driving steel prices right now is the strength of the flat-rolled producers’ order books. This is reflected in our Average Mill Lead Time (see Figure 1), which “Steel Market Update” produces twice a month. Any pullback in lead times would be a signal that the market has peaked.

You can learn more about the flat-rolled steel market trends, pricing, and educational workshops at the “Steel Market Update” Steel Summit Conference, which will be held Aug. 29 to 31 in Atlanta. Visit www.steelmarketupdate.com for more information.

About the Author
Steel Market Update

John Packard

President/CEO

800-432-3475

John Packard is the founder and publisher of Steel Market Update, a steel industry newsletter and website dedicated to the flat-rolled steel industry in North America. He spent the first 31 years of his career selling flat-rolled steel products to the manufacturing and distribution communities.