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Steel market wrestles with slow recovery

Steel prices remain low compared to early in the year

Steel mill

Steel producers and distributors cope with lackluster demand for their products. Getty Images

Steel industry sentiment took a more pessimistic turn in July and August as COVID-19 continued to outsmart government and health officials who can’t seem to unite on a strategy that will stem the spread of the virus. Steel Market Update’s Steel Buyers Sentiment Indexes had been improving steadily since hitting bottom in early April, but backtracked last month, reflecting steel buyers’ frustration over the slow progress of recovery.

Every two weeks SMU asks steel buyers how they view their company’s chances for success in the current environment and three to six months in the future. The Current Sentiment reading in the survey taken the week of Aug. 3 stayed at +34, the same as the prior week and down 8 points from the first week of July (see Figure 1). Current Sentiment hit a low of -8 in the first week of April, its lowest reading since November 2010.

Likewise, SMU’s Future Sentiment Index was unchanged at a reading of +38 (see Figure 2). That’s down from +52 in the week of July 9. Future Sentiment hit a recent low of +10 in early April shortly after the pandemic took hold. Sentiment Index readings were in the upper +50s and +60s in 2019 and Q1 2020.

Future Sentiment readings are almost always higher than Current Sentiment, as it’s human nature to be more optimistic about the future. The fact that Future Sentiment, at +38, is not much more positive than Current Sentiment, at +34, says something about how discouraged many businesspeople have become.

Steel Prices Near a Bottom?

Steel prices continued to slide in August. According to SMU’s check of the market on Aug. 3-5, the benchmark price for hot-rolled steel was around $440/ton, including some deals reported well below that number (see Figure 3). Hot-rolled is down nearly 30% from pricing of over $600/ton at the beginning of the year before the coronavirus devastated the economy.

Other flat-rolled products prices firmed a bit last month. Cold-rolled and galvanized steels were selling at an average of $640/ton, FOB the mill, east of the Rockies. Galvalume was slightly higher at $685/ton. The price of steel plate was at $590/ton.

Seventy percent of the buyers polled by SMU in early August said they believed prices were near the bottom of the current market. A $40/ton price increase announced by the integrated mills on July 21 fell flat when the electric arc furnace mills declined to follow suit. Some buyers were expecting the minimills to raise prices in August, while others expressed doubts that steel demand had recovered enough for a price hike to succeed. SMU opted to keep its Price Momentum Indicators at Neutral at that point because the direction of the market remained unclear.

The cost of ferrous scrap has a lot to do with how much steel mills charge for their products. Higher scrap prices generally lead to higher finished steel prices, or vice versa. Scrap prices for August were not as weak as expected but varied widely by region. Prices on the East Coast and in the Southeast were up $30/ton because of strong export demand, and prices in other parts of the country traded sideways for obsolete grades and down $20 to $30/ton for prime grades. Looking ahead to September, most experts were predicting higher scrap prices overall.

“I think we are seeing an inflection point in the domestic market brought on by strong international pricing. The export market, which is being driven by exceptional demand in China, continues to rise with expectations that this trend will continue through October,” commented one scrap dealer in the Northeast.

SMU keeps a close eye on mill lead times, which are a leading indicator of buying activity. Longer lead times for steel delivery indicate that the mills are processing more orders. Lead times for spot orders of flat-rolled steel from the mills were at their shortest in the week of April 30 as orders dried up because of the coronavirus crisis. Since then lead times have extended by about half a week. As of mid-August, lead times for hot-rolled and plate steels were less than four weeks, while lead times for cold-rolled and coated were approximately six weeks. Lead times are still shorter than normal, however, which suggests that the mills could be busier.

Steel Market Update graphic

FIGURE 1. Steel buyers remain somewhat optimistic about the overall steel market, according to a Steel Market Update survey done in early August. The sentiment has leveled off a bit compared to only a few weeks ago but is much better than in April. Steel Market Update

Judging by steel mill capacity utilization, orders are picking up, though at a slow pace. The American Iron and Steel Institute reported that capacity utilization by the domestic mills topped 60% in the week ending Aug. 8. That’s an 18.2% improvement (up 9.3 percentage points) from the trough in the week ending May 2 when the mill utilization rate was just 51%. The industry still has a long way to go to reach the pre-pandemic capacity rates above 80%.

What Respondents Had to Say

One of the best ways to gauge the health of the steel market is to talk to those that are a part of it. Here’s what they are saying:

  • “I believe a price increase by the minimills will be accepted. Demand is improving in lots of industries. Consumer spending is on the increase. Scrap will move higher in September. Iron ore is very high, so the integrated mills have to keep pushing prices higher. The minis will lead the way, knowing that.”
  • “We expect the minimills to attempt an increase, but there isn’t much room to run, as a lot of idled capacity has come back online. Lead times for cold-rolled and coated steel will extend into the fourth quarter, and I don’t think many players will be interested in major stock buys with lead times into 4Q. Furthermore, a lot of contract tons will continue to ship out in September at historically low pricing levels. Those who don’t need spot may be content to rely on contract tons.”
  • “We’re seeing some increase off of the recent lows and some firming for the hot-rolled base to get to $450 and then $460-$470. The chance for further erosion seems low. Base prices should follow where the scrap price leads in September and beyond. Scrap prices are expected to rise, according to normal seasonality this fall. Given the strength in the export market for scrap, that should be a no-brainer.”
  • “I think the upside for sheet pricing will likely be limited, and we won’t see sizable increases. We’re seeing a return by the mills of using nonbase factors as discount mechanisms in order to ‘protect’ or increase the base price. Freight, grade extras, size extras, etc., are being discounted as an incentive to generate orders, while technically using a higher base price.”
  • “COVID strikes again. A few customers are limiting operations or closing down again due to outbreaks in their plants. Just as things started getting back to normal.”
  • “It’s difficult to make any accurate predictions due to the fluctuation of the virus in different areas of the U.S.”
  • “There are still too many unknowns.”
  • “I fear more of the same for the balance of the year.”

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About the Authors
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.

Steel Market Update

Tim Triplett

Executive Editor

Tim Triplett, senior editor for Steel Market Update and the former editor-in-chief for Metal Center News, can be reached at tim@steelmarketupdate.com.