The breaking of records will likely be a common feature at this summer’s Tokyo Olympics, but the scaling of new heights is not confined to sporting achievements.
MEPS has been publishing prices for North American steel products since before the Atlanta Games in 1996, and our US hot rolled coil figure reached its highest ever level in January 2021. This record was smashed once again last month. It is highly likely that March’s declared number will also be an all-time high, with robust market fundamentals persisting.
One MEPS US contributor remarked in February that the “most expensive steel is no steel”. At present, most local spot buyers will pay whatever is necessary to secure material and service their customers. The question is how high will prices go, and for how long?
Most US steel market participants are well acquainted with the boom-and-bust nature of domestic basis values, but some report that the scale of the recent rise is almost without precedent.
Supply-side considerations have been the catalyst for the rapid escalation of prices. A distinct lack of material from both domestic and foreign steel producers has prompted US flat product selling values to skyrocket in recent months.
Many US steel manufacturers made coronavirus-related production cuts last year. Several blast furnaces remain idled. Local capability utilisation, year-to-date, has reduced by more than 8 percent, compared with the equivalent period in 2020.
Supply shortages, domestically, have been exacerbated by a lack of interest from importers. Existing Section 232 measures and the greater complexities of transporting material into the country during the winter period may have discouraged traditional overseas suppliers.
A rapid spike in shipping costs, notably for container shipments, has also played its part. This is due to disrupted trade flows, globally, and greater port disruption, relating to Covid-19.
Demand outstrips supply
In recent months, several US steel producers have taken a measured approach to reintroducing capacity. Increases in domestic mill output are failing to keep pace with the pickup in market requirements.
Activity levels in numerous steel-using areas are healthy. Demand from carmakers has been strong, owing to a lengthy period of restocking, following the enforced closure of auto manufacturers in 2020. Construction-related activity has been relatively firm, during an unusually mild winter, for the most part. A pickup in drilling activity, albeit from low levels, has also been noted.
Naturally, US steel producers have taken advantage of the current environment by raising their list prices on a regular basis. Domestic stockholders have been largely successful in passing the mill hikes through the supply chain, to date. Most steel consumers appear to have been accepting of the price advances, as they have little option but to pay the inflated levels.
Prices approaching their peak
MEPS predicts that the positive trajectory of US steel values will continue in March, and possibly April. However, domestic stockists should brace themselves for a reversal of pricing fortunes, during the second trimester.
Steel supply is forecast to expand in the coming months. Local mills are unlikely to advertise their intention to increase production, but there is a huge financial incentive to do so given current price levels. This could prove counterproductive to their pricing ambitions.
Import volumes into the US are also expected to grow. With domestic hot rolled coil figures now around US$1200 per short ton, foreign suppliers will inevitably come back into play. The reopening of the Great Lakes navigation, shortly, will assist this process.
However, a significant rise in international steel prices and the prospect of a 25 percent duty for non-exempt material complicates matters. Many foreign producers are now quoting late second quarter delivery for new orders.
If the pricing bubble bursts, as is possible, then many local buyers will have high-cost inventory on their hands during the summer. As a result, US steel distributors may be wary of buying offshore material.
High costs hit projects
The longevity of the recent mill price gains is unlikely to be supported by demand fundamentals indefinitely. Economic growth in the US is forecast to be modest for the remainder of the year, with continued challenges related to the coronavirus pandemic.
Many steel-intensive projects are likely to be scaled back or pulled, due to the high cost of raw materials. Moreover, US automotive companies are expected to cut production in the coming months, as a consequence of the semiconductor shortage.
US steel prices are often turbulent in nature. Many domestic buyers speculate that values will gravitate towards a level that is sustainable for both buyers and sellers. History suggests that a prolonged downward price trend is highly likely during 2021, but this is by no means a foregone conclusion.