Optimizing Risk Control in the Steel Market
In recent months, the US Hot Roll Coil (HRC) market has exhibited remarkable volatility, and all indications suggest this trend is likely to persist. We’ve witnessed a historic correction, with HRC pricing plummeting from $1,200 per ton last Spring to under $770 per ton today—a staggering 42% decrease over the past five months. Even daily price indices have consistently reported figures below $800 for over a month, and weekly contract baseline indices have dipped below $770 per ton. The question on everyone’s mind is: What is driving this level of volatility in such a short span?
MARKET DRIVERS
Domestic steel mills have been enjoying a period of strength, thanks to tariffs on international imports. Early spring saw significant mill outages, which temporarily bolstered prices. However, new capacity has since come online with improving performance at mills like Nucor Gallatin and SDI Sinton. Surprisingly, this additional capacity has had limited impact on perceived mill pricing power. When steel prices dipped in early summer, mills attributed it to the typical seasonal slowdown and continued pushing for price increases to maintain their profitable spread between input costs and price realization. Mills had grown accustomed to a busheling to HRC price spread ranging from $350 to $600, expecting the status quo to persist. Now, that spread is at risk, currently sitting closer to $300, along with the CME HRC Futures in October that have dipped below $700. In an effort to stem this price decline, another round of mill price increases is expected soon. However, these announcements are not necessarily justified by demand, as evidenced by the mills booking private, high-volume deals to secure orders for October.
Lead times at mills currently stand at 4 to 6 weeks, with an increasing trend of early deliveries. Moreover, over a million tons of production are scheduled to be taken offline in September and October for maintenance purposes. Adding to the uncertainty, one of the largest steel mills in the country, US Steel, is up for sale, which in itself is unsettling in the market.
Consumer Behavior
During and after the pandemic, US consumers defied economic gravity by spending as if there was no tomorrow. A sense of “Fear Of Missing Out” (FOMO) led to the purchase of homes in new locations, new cars, increased travel, and dining out. However, signs now point to a slowdown in consumer spending as the demand for goods finally wanes. Factors such as the transitioning from a pandemic to an endemic, the end of summer, the resumption of college loan repayments, mounting credit card debt, and the highest interest rates since 1981 are all contributing to this shift.
Labor Unions
In addition to these market dynamics, there are unprecedented wage growth trends in specific industries. For instance, reports indicate that the Teamsters Union UPS contract provides average compensation of $170,000 per year to its parcel delivery drivers. Simultaneously, the United Auto Workers (UAW) authorized a strike related to lagging compensation, with demands for a 42% wage increase for a 32-hour work week, resuming company-funded pensions, and full medical coverage. A potential multi-week strike by UAW, even if aimed at just one auto company, could significantly disrupt the domestic steel pricing market.
MOVING FORWARD
Given this complex landscape, moderately sized buyers should view the steel market as a business risk and take proactive steps to mitigate it. For those in this middle ground, establishing a robust agreement backed by a strong service center supplier relationship is a sound solution. This entails shifting the focus from steel as a profit center to emphasizing what can be controlled—profit through operational value-add. Building relationships through honest fabricator near-term forecasting, supported by service center guaranteed supply, along with market-relevant pricing, will enable both fabricators and service centers to weather this incredible volatility.
