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Argus: U.S. Service Centers Showing Uncommon Discipline

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MCN Editor Dan Markham Has there been a “structural change” in the way North American service center operate? 

That was one of the questions posed by Rye Druzin, an associate editor at Argus Media, during a recent webinar, Global HRC Market Update 2023. 

In 2022, Druzin said, a lot of service centers took hits as pricing began to fall from the incredible highs of 2021. Other than the February to April period, when prices spiked in response to the Russian invasion of Ukraine, and a brief pickup at the end of 2022, the price for hot-rolled coil spent the year tumbling downward. 

“For service centers dealing with lowering prices, they had to understand that every time they bought steel, it was almost assuredly under water or financially stressed by the time it made it to their door,” he said. 

The financial headwinds had many distributors looking to renegotiate contracts with the mills, whether that meant lower rates for the new year or reduced tonnage. Others simply violated their contracts for minimum tonnage levels and challenged the mills to exercise clauses in their contracts.

They would then play more in the spot market, he said. 
This behavior led to tightened stock levels in the distribution segment, which history suggests would be followed by a spending splurge. 

“Mills believe that means the service centers have to come back to the market,” he said. “But service centers have shown a level of discipline that has proven many people wrong and has upended the traditional thesis in the market that when inventors are tight, service centers are going to buy by default. That’s been turned on its head a little bit,” he said.
“Rather than stocking up, they’re trying to manage through this moment with lower stocks, which they’ve gotten more used to. They know the risk is they overorder and bring in steel that is under water by the time it gets to their door.”

Pricing for HRC in the United States peaked in April at approximately $1,200 per short ton. The climb was driven by a dip in supply, Druzin said, with some furnaces offline and the leading EAFs running at lower than usual capacity levels. Since then, the price has come down considerably. But the supply constraints of the first quarter have more than been eliminated. 

“The U.S. economy is doing very well, but it’s not good enough to soak up the amount of supply in the market, with new steel mills online, with idle blast furnaces being brought online. They’re simply not seeing their supply consumed by demand, “ Druzin said. 

U.S. mills attempted to reverse course with some recent calls for price hikes, though how sticky they are remains to be seen.

Though demand may not be enough to absorb the new supply, it remains surprisingly robust. The automotive industry is mostly past the semiconductor and other component shortages that have plagued it since the pandemic. “Automakers, while maybe not at the same levels where they were before the pandemic, are definitely producing more. That is driving a lot of demand for galvanized steel and other products.”

Another major sector, construction, is stronger than expected given the numerous interest rate hikes announced to combat inflation. Likewise, manufacturing  seems steady, at worst, he said. 

The resiliency of the U.S. economy has come as a surprise, particularly given some of the pressing conditions experienced in Western Europe and Asia. 

“A lot of people have not seen the drop off they expected. A lot of the talk about recession in the U.S. has not come to fruition and left a lot of service centers scratching their heads,” he said. 

Even with the recent decline, the U.S. price for HRC retains a sizable premium vs. the rest of the world. Some have wondered why that hasn’t invited more imports in. Uncertainty and consumer discipline are the likely culprits. 

“Sources I talk to are uneasy about bringing in imports because of the pricing uncertainty in the U.S. market,” Druzin said. However, “we could be seeing some sort of inflow of hot-rolled into the U.S. compared to the past, cold-rolled and galvanized less so. Those products are still under pressure.”

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