Metal Movers: A story of US steel supply

Author Argus

Join Colin Richardson, Editor - Steel, and Rye Druzin, Senior Steel Reporter, as they explore the drivers behind the US HRC price plummet last year and how the market is now recovering as the supply chain returns to a new normal.

Our Argus speakers also comment on current lead times for steel and the impact of semi-conductor and component shortages on demand.

 

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Transcript

Colin: Hello, everyone, and welcome to this podcast brought to you by Argus Media, a leading independent provider of energy and commodity pricing information. In this episode of "Metal Movers," we will talk about the crazy world of the U.S. steel market. My name is Colin Richardson. I'm the steel editor for Argus in London. And I'm joined by my colleague, Rye Druzin, our senior steel reporter in the U.S. Hello, Rye. How's it going?

Rye: Hey, Colin. How's it going?

Colin: I'm very good. Thanks, Rye. Yeah. So, Rye, if I can take you back just very briefly to, let's say, the end of August of last year. At that time, the U.S. hot-rolled coil price in the Midwest was trading a discount to the northwest European markets, it was a discount of maybe five or seven bucks on a metric ton basis, something like that. And if we fast forward to today, the U.S. is trading at over $1,000 per metric ton premium, which is quite insane. So, can you just explain to us what's going on?

Rye: Yeah, absolutely. So, in August of last year, I think as everyone will remember, we were in the midst of some of the worst parts of the coronavirus pandemic. And in the U.S., what that meant is we had almost total economic shutdown. And the how that rippled through the steel market was that, downstream manufacturing automakers, your tooling companies, air conditioning, refrigerators, all that, a lot of that closed down because it wasn't considered to be essential. And in August, you had this combination of too much supply in the market and not enough demand. And something turned around in August of 2020, where demand started to ramp up. And in many ways, it ramped up faster than supply could catch back up to it. And a lot of that was driven by blast furnace-based or integrated steelmakers, who had taken down, we estimated, somewhere around maybe 20 million short tons a year of raw steel production or hot metal production. And what that meant was that it took them a while to get their operations back online.

At the same time, when demand, as I said, was outstripping supply, so you had many, many people trying to book tons that just basically didn't exist. And that led to large order backlogs, long lead times, people were waiting months, and months, and months to get steel, in some cases, for six months, domestically, which is, I mean, pretty absurd in the general scheme of things, usually, lead times, "healthy lead times" are four to six weeks. And below that, the market sees there being as too much supply. And where prices went from there, from a mid 400s a short ton for HRC in August was to nearly $2,000 a ton in the Midwest, by, probably, I would say, we broke that $1,900 mark in August, and we hit the peak in September, mid-September of this year. And really, this is a supply story. As I said before, steelmakers had issues bringing production online, but then even when they did, with the amount of demand that was on the market, they struggled to get their order books under control. We've seen this happen before where steelmakers overbook, and there were many instances where I heard that someone would come in, and they would offer way more money than where the market was. And the steelmaker would slot them into the current order book. And as you can imagine that upset some people in the market, mostly service centers. And, yeah. So, it's been a bit of a mess in the market up until recently.

Colin: You know, we've had that same sorts of dynamic all over the world where supply couldn't catch back up to demand quick enough. And I think it was a similar thing in Europe. It was around August where demand snapped back insanely quickly, and the mills were caught out. I guess now we've gotten to the point where, you know, those lead times, certainly, here in Europe have started to recede. I mean, if you're a service center today, you can probably still find fourth quarter tons, you know, certainly, December tons. And that's basically the same lead time, as the mills we're talking about in May, before the summer holidays. So, there's been a real contraction. Can you just take us through, I mean, how lead times are at the moment? And what's the feel in the market for how things are going to develop over the next few months? Are you seeing the semiconductor and component shortages having, you know, any impact on steel demand and any impact on apparent purchasing by service centers, etc.?

Rye: Right. Yeah, absolutely. I think what we are seeing right now is the market has gotten into the clearest equilibrium it has had my almost three years at Argus. And what that means is supply and demand almost seem matched right now, but there's a lot of warning signs in the market that are making many, many people, especially buyers, skittish. So, we brought up automotive, that is the biggest weak spot in the market right now. The automotive industry in the U.S. has been dealing with semiconductor shortages, just like much of the world has for, essentially, the last year at this point. And how that has manifested is lower steel consumption in the U.S. market, which means that there has been more spot-on availability than otherwise would have been out there. Now, what's really interesting is that the steelmakers in the United States have been, what some would say, more disciplined this time than in past eras, where, say in the past, steelmakers may, in order to fill their books, cut deals, and lower price transactions, and, essentially, undercut where the spot market is in order to fill their books.

Now, in a much more consolidated market, you've got to realize we're down to four major steelmakers in the form of Cleveland-Cliffs, Nucor, Steel Dynamics, and U.S. Steel. They are the four largest steelmakers in the U.S., and they make up a vast majority of the steel production. And they have been much more disciplined this go around, some say, than in the past. So, where we're at right now, as I said, is this equilibrium point where pricing is still above $1,900 a short ton. I think many, many people are very surprised that steelmakers have been able to maintain the price, but there is growing skepticism in the market that they will be able to, partly, because the spread between international prices is so wide that cheaper priced steel is flowing into the U.S. in the form of places like Houston, and HRC imports, and stuff. We just saw, for September, data came out this week that showed that over 300,000 tons of hot-rolled coil was imported to the U.S. in that month, according to preliminary data from the U.S. Department of Commerce. And that is one of the highest numbers recently, if not the highest in years. And what that means is that that lower price steel, you know, say it sits in Houston or something, it's challenging domestics ability to keep and maintain the price, where it is in the $1,900 range, which they would love to, as you can imagine, because they are banking record profits right now.

Nucor alone, the largest steelmaker in the United States, made a third-quarter profit of over $2 billion. And as they put it, it nearly matched the profit of one previous year altogether. So, they're doing just fine. All the steelmakers have posted their own record profits. And there's a lot of moves, too. I mean, the steelmakers aren't just sitting there with piles of cash being like, well, I guess we're... You know, they're not a dragon sitting on a mountain of gold, and saying, "We're never gonna spend it." They are spending their money. Cleveland-Cliffs bought FPT, a prime scrap supplier in the Midwest. Recently, Nucor and U.S. Steel both announced their own 3 million short ton a year, flat rolled mills that they intend to build. I presume we'll get more details on that from U.S. Steel, who they released their earnings this afternoon, and they'll have their call tomorrow. And when it comes to what's going on now is basically a standoff. We've got buyers who are seeing cheaper steel coming in, cheaper steel that they can buy in Houston, they could ship it almost anywhere in the U.S., and they'd still make a profit. And at the same time, you have domestic mills, who seem to be unwilling to negotiate in a real way, pricing downward.

Colin: Yeah. I suppose the risk for mills is that, you know, you can hold your prices proud and you can be very firm. But if the gap with global prices gets too big, and let's say, it's something like, I mean, we mentioned the spread to Europe, the spread to China is even bigger, isn't it? It's something like $1,200 or 1,220 bucks a premium for the U.S. There is a risk that they just lose market share to import, I guess.

Rye: Absolutely.

Colin: Do you think that's something they're wary of, and that might play a part in prices going forward in the coming months?

Rye: I think the one thing that I've heard pretty consistently is when it comes to Europe, which is the one that's under review right now by the United States on the Section 232 Tariffs, a lot of people in the United States aren't terribly concerned about imports from Europe because, previously, they were not a significant importer into the U..S. And even now, you know, you and I were talking a little earlier about this, the imports of our products into the U.S. are relatively minimal compared to, say, our neighbors in the North Canada, who imported over 200,000 tons of hot-rolled coil into the U.S. in September. And so I think there is a risk there because, obviously, if you see a shiny gold bar out in the distance, that is the United States, and, you know, you're looking at your domestic market as kind of a low dollar and not so active, you know, you may decide to send some of your steel from Europe to the United States. But I think it's interesting that, you know, most people I talked to, especially traders and stuff, they discuss how steel mills really want to keep as much steel in their domestic market or regional market because it's much easier, especially right now, especially with logistics being an absolute mess. And, you know, me having people who deal with Turkish steel saying that they used to start looking for a vessel 10 days out, now they're having to look 30 to 40 days out. So, with all the logistical issues that are going on, I think that that may help to keep imports at bay, at the same time, I mean, the amount of imports coming to U.S. right now are definitely astronomical compared to where they were at this time last year, which is no surprise because, essentially, we were in a recession last year. But they're even... I mean, they're not historically high, but they're definitely getting to levels that are pretty significant overall. So, I think we're already seeing some of those flows into the U.S.

Colin: Yeah. I mean, if I'm, you know, from a European steel mill, you know, I would sell every kilo of capacity into the U.S. or at least the North American markets. It makes no sense to me. We've got European steel mills selling into places like Turkey at the moment for, I don't know, $910, $920 a ton. And you just think, "Why it's so strange," but maybe the whole 232 discussion plays into that. And the Europeans know they don't want to put too many tons into the U.S. before there is a resolution there, if there is one. But like you said, historically, I mean, pre-Section 232, you're probably sold around 40,000 to 50,000 tons or so of hot-rolled a month into the U.S. on average. You know, it's not huge tons, but I think it is a risk, not just from Europe but from everywhere in the world that the U.S. market has to be aware of, and maybe that helps explain the massive backwardation that you see on the CME. Anyway, I guess we're probably coming off to our time limit. Rye, is there anything that...you know, any concluding thoughts you wanted to touch upon, or anything that you'd like to discuss before we go?

Rye: No, I mean, I think right now where the U.S. market is, is that everyone is trying to figure out how the year is gonna close out and how the U.S. steel mills will keep pricing. I think that looking into next year, people do expect demand to be pretty solid, but, you know, there's all these other issues, whether it's logistics or labor and things like that, and people are kind of wondering whether or not the U.S. economy is kind of tapped out as to how much it can produce, so time will tell. We'll see.

Colin: Okay, Rye. Well, thank you very much for your time. I really appreciate it. And thank you, everyone, for listening. If you enjoyed the podcast, please tune in to our other episodes to learn about the metals market. For more information about steel, please visit argusmedia.com. Thank you very much for your time and attention.

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