Volatility in steel prices likely to continue

Electricity will become an important factor as more production shifts to the electric arc furnace route in steelmaking in the U.S. But the steel industry won’t be the only industry segment thirsty for power. The continued growth of data warehousing, cryptocurrency mining, and the rise of artificial intelligence also calls for more energy than the U.S. grid has ever produced. Nordroden/iStock/Getty Images Plus

What strikes me if you look at U.S. sheet prices compared to those just about anywhere else in the world is how volatile the market here is. We saw hot-rolled coil (HRC) prices increase 62% throughout Q4 2023. They then almost immediately reversed course and started falling in the new year.

Prices in other regions followed a similar pattern. But the magnitude of the volatility is unique to the U.S.

How do steel consumers in the U.S. manage a business with a raw material price that whipsaws even in times of roughly stable demand? Yes, steel is a cyclical business, and it always will be. But the volatility of the last few years in sheet is something new.

It’s almost like trying to build a stable, profitable business around Bitcoin – the posterchild for volatility. I don’t know whether anyone has charted Bitcoin volatility compared to HRC volatility, but I suspect U.S. sheet prices and crypto might have more in common than we think.

Big Tech Hungers for Electrons

Speaking of things digital, artificial intelligence (AI) was one of the big themes at the Fabricators and Manufacturers Association’s Annual Meeting in Clearwater, Fla., in February. The hope, and I’m way oversimplifying it here, is that AI will perform a lot of the grunt work that we do now (such as front office tasks) without destroying life as we know it.

It reminds me of conversations around any powerful new technology. Think debates around nuclear energy in the middle of the last century or the power of social media at the beginning of the 21st century. So why am I thinking about nuclear and tech right now?

I used to cover aluminum, and much of that coverage focused on electricity. That’s because electricity is the biggest single cost for an aluminum smelter. It’s similar to how closely steel follows scrap price movements.

Industry veterans would sometimes point out to me that smelters built in the western U.S. had become uneconomical in the late 1990s and early 2000s, partly because of the rise of tech, which increased demand (and prices) for electricity. Another factor was a lack of new electricity supply to meet increased demand, something that resulted in rolling blackouts in California in 2000-2001. (Other factors came into play as well, but I’m not going to delve into the Enron saga here.)

Are There Enough of Them?

Are we at risk of history repeating now? I ask that because Bitcoin mining, for example, is notoriously energy intensive. Then there is the electricity needed to keep all our digital stuff in the cloud; the carbon footprint for data warehousing rivals the airline industry. And now we’re adding generative AI, whose thirst for energy could grow to rival that of entire nations.

Steelmaking doesn’t require as much electricity as aluminum smelting. But as more production shifts to the electric arc furnace route, not only in the U.S. but abroad as well, electricity will become a more important factor. That’s not a problem if there is enough electricity to go around, and if electricity rates don’t become as unpredictable as Bitcoin.

But back to the example of California in the late ’90s and early aughts. A drought then, combined with the state’s reliance on hydropower, resulted in one set of rolling blackouts. What happens, for example, if we see a big heat wave this summer?

Let’s say we see sharply increased demand for electricity from residential customers to power air conditioners, and it coincides with current electricity demand from heavy industry and higher demand from tech as well. Do we have rolling blackouts like we did 20 years ago? (I should note here that it wasn’t just California that saw blackouts in the early 2000s. So did New York City, which suffered a blackout that lasted for days in the summer of 2003.)

The Rise of SMRs

Steel and big customers like automotive want not only more electrons but also more green electrons, energy derived from renewable sources like wind and solar. So where do all those electrons come from when the wind isn’t blowing and the sun isn’t shining? One obvious solution would be for the U.S. to adopt more nuclear power generation.

That’s why I think you’re going to be hearing a lot more about small modular reactors (SMRs). The International Atomic Energy Agency notes they can produce about a third of the electricity of a traditional nuclear power plant at a fraction of the size. Also, because they are modular, they can be made in an assembly line process—which makes them more affordable.

Other countries and regions are already pursuing SMRs. The technology itself is safe and proven, but not everyone feels that way about nuclear power in general. Younger generations, understanding that it is a necessary supplement to renewables, might be more accepting of nuclear energy. However, older generations might still identify nuclear energy mostly with past disasters, like Three Mile Island in Pennsylvania in 1979 or Fukushima Daiichi in Japan in 2011.

Democrats and Republicans don’t agree on much these days, especially in a presidential election year. But they have been surprisingly unified when it comes to subjects like trade, infrastructure, and industrial policy. Perhaps they could get together to help change public perceptions on nuclear? Maybe they could even work together to cut red tape when it comes to permitting and building SMRs? We might not agree on a lot of things, but I think we all can get behind a greener and more robust energy plan to support industry in the U.S.