Is the Steel Market Changing?
The Hot Roll market price in the US has declined in the last few weeks but has not collapsed. Steady demand coupled with capacity restrictions from the remaining mill maintenance outages are holding mill lead times close to 8 weeks for new orders. The June order book has closed at many mills. After price increased from March into April due to those supply restrictions, prices have moderated recently and given pause to buyers expecting further price declines in the coming weeks. Depending on the index, the current Hot Roll price is around $1,130/ton.
The CME HRC futures market has moved significantly lower during the last 3 weeks. On April 11th, CME HRC for July was $920 and dropped down to $811 for August. On May 8th, those same months slid to $870 and $787, respectively. This causes concern that an actual market price correction is pending.
ECONOMY
After 10 consecutive rate hikes by the Fed aimed at slowing inflation, and by their own account directed at reducing job creation, unemployment has dropped to 3.4% in late April. This is the lowest unemployment rate the US has seen in decades. Low unemployment combined with increasing wages have kept the legs under consumer spending and manufacturing demand, beyond what the FED had hoped for and what many industry watchers had anticipated. David Burritt, CEO of U.S. Steel, commented during their April 28th Earnings call: “Customer demand is healthy. If you think about it, 8 weeks lead time, 75% utilization across the industry, good demand in key markets like auto and appliance and service centers. And so we really do have this very healthy backdrop.” Since those comments, steel mill utilization has increased to 76.3% as mill exit planned maintenance and facility expansions at Nucor Gallatin and SDI Sinton improve capability and increase output. Against these upward production volumes, scrap has settled down $10 to $35/ton in the Midwest.
FUTURE
History shows that once the market turns, not only can it turn quickly but there is also potential for it to over-correct. The unexpected strength of American consumers, mill capacity restrictions, and limited imports have held the market up so far. Steel buyers are looking into their future market crystal ball as they consider the increased mill capacity coming on-line, input costs declining, approaching seasonal slowness, and future demand due to interest rates. It may turn into a self-fulfilling prophecy as steel buyers cautiously expect the price to continue downward and limit buys, all while pricing falls faster than expected as mill lead time shrink and gaps appear in current month mill order books. Either way, change is anticipated.
Written By: Mike DeBoer, Metallurgist