Flat-rolled steel prices ended at an unprecedented high in 2020, an almost unlikely turnaround which was an incredible low seen in the spring when the U.S. economy was sickened by the coronavirus.
The benchmark price for hot-rolled steel was quickly approaching $900/ton as of mid-December, double the low seen in mid-August. It is rare for a business to recover so far in just four months. In terms of the pace of this price cycle, hot-rolled coil prices continue to set records, CRU, the parent company of Steel Market Update, said.
A lesson in the laws of supply and demand is the underlying reason for this sudden turnaround. The consumption of steel has bounced back at a faster rate than the supply available. Not only has demand increased, but these increases have come at a time when stock levels have traditionally been low and restoration has been needed to meet increasing demand.
In the second quarter, when the government ordered the shutdown of nonessential businesses to curb the spread of COVID-19, the steel mills were swift to idle furnaces and curtail production. They have been strategically judicious since then about how quickly they bring back the idled power. Moreover, unplanned outages were encountered by different mills that further disrupted development. Steel supplies, coupled with duties and tariffs that have prevented imports, have tightened to the point where some OEMs and producers are willing to pay a high premium to secure the raw materials that are urgently needed.
Steel rates have gotten so high that imported materials, even with tariffs, are now affordable. Many buyers have started looking outside the country for alternative sources to fulfill their steel needs. The industry survey of the Steel Market Update on Dec. 7-9 showed that approximately one-third of buyers had already bought foreign steel and one-third intended to buy foreign steel, while only one-third planned to continue domestic sourcing.
‘Foreign steel is becoming increasingly common,’ said one respondent. Some players are desperate, and at almost any price they have to purchase. In over a decade, I have not seen a demand like this.
Until steel stocks, and thus costs, start to normalize, it’s only a matter of time. The question is about when. Increased steel production that eases the tight supply should bring the new year. The November start-up of the new electric arc furnace (EAF) at Big River Steel in Osceola, Ark., which doubles the capacity of the mill, includes recent capacity additions. US. U.S. In early December, Steel announced that it was restarting the No. 4 blast furnace at its Indiana facility at Gary Works. It is expected to follow similar announcements by other mills.
CRU reports that in the fourth quarter of 2020, mill capacity rose by almost 18 percent from second-quarter levels. Over the same period, however, apparent net consumption increased by 21%, helping to explain the supply-demand gap that drove steel prices so high. CRU predicts that supplies in 2021 will grow at a faster rate than demand and that steel prices will peak in mid-Q1. Meanwhile, the potential for hot-rolled sheets to reach the unusual $1,000/ton mark last seen in 2008 remains.
Deals from Blockbuster
The steel landscape shifted in 2020 with the Blockbuster transactions. The Cleveland-Cliffs mining company purchased two of the largest integrated mills on the market, AK Steel and ArcelorMittal USA, making it North America’s largest steel sheet, plate, and slab manufacturer. Big River Steel, the newest and most advanced EAF minimill, was purchased by U.S. Steel, the old-line integrated steelmaker, with the goal of following a special “best of both” strategy.
These combinations of suppliers of raw materials, conventional blast furnace steelmakers, and scrap recyclers have further blurred the market’s competitive lines, making it even less stable for 2021.
Every two weeks, SMU asks steel buyers how they see the chances of their company’s success in the current environment and in the future for three to six months. In mid-December, the SMU Current Sentiment Index posted a rather robust +69 (see Figure 1), while the Future Sentiment was not far behind at +655. (see Figure 2). Present Sentiment plunged to -8 and Future Sentiment to +10 in the second quarter, shortly after the pandemic struck, to put those figures in perspective. The surprising turnaround in optimism to near record levels reflects the increase in the price and profitability of steel. The excitement can also be a sign of relief over the eventual use of vaccines for COVID-19.
What Steel Buyers Claim
They are also asked to provide any input they may have when surveying steel buyers about their current and near-term feelings about the market. Few recent comments are here:
“These prices are warranted by the national supply/demand imbalance coupled with the international supply/demand imbalance. For electric arc and simple oxygen furnaces, add higher raw material costs, and you have a perfect storm.
“This is a blend of 2004 and 2008. They all scramble for steel, so they double up on orders. Even OEMs have clients who place multiple orders because they hedge their bets on who will get the final product quicker for them. They will cancel their order with the other OEM when the end product ships to them, and then this will cascade back into the supply chain of steel. I truly see the potential setting up of the 2008 price curve. Note, during 2008, scrap and iron ore was also extremely strong. Look at what 2021 is predicted by the analysts. All looks very familiar.
The tightness of supply is what is going to stop us from succeeding. If we can get steel, we cannot make a sale. Over there in the trenches, it’s really ugly.
“We will be in pretty good shape once we get clear of the availability issues, which I expect to continue through February 2021.”