Business Topics

Record-High Prices Post Record Opportunity, Risk

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Prices for flat-rolled steel products have been on a relentless uptrend for the past nine months, reaching their highest levels in contemporary history. Steel Market Update reported a new all-time high for hot-rolled coil of $1,500 per ton in the first week of May – more than triple the price at its low point in August last year – with momentum pointing still higher. Cold-rolled and coated products have experienced similar inflation. These record-high steel prices have brought record opportunity for service centers – but also record risk.

Why? Demand for steel continues to outpace supplies. Steelmakers curtailed production last spring when the government shut down much of the economy to stem the spread of COVID-19. And producers have been measured in bringing that capacity back online. As for new capacity, Ternium’s new hot-rolling mill in Mexico and Steel Dynamics’ new EAF mill in Texas are expected to add nearly 7.5 million tons per year of sheet production to the North American market. But that might not be enough to affect prices until well into the second half of 2021. And there is a case to be made that new capacity – including expansions under way at Nucor Steel Gallatin in Kentucky and North Star BlueScope in Ohio – won’t have an impact until 2022. 

Meanwhile, the economy is riding a sugar high from government stimulus. The major steel-consuming markets – construction, automotive, manufacturing, even energy to a lesser degree – have rebounded dramatically, boosting sales for steel producers and distributors.

Industry-leading service centers, such as Reliance and Olympic, reported record sales and profits in this year’s first quarter. The gains were fueled by the convergence of surprisingly strong demand and unprecedented prices. For service centers of all sizes and specialties, 2021 has been a boom year so far. Which drives the question: How much longer can the party last?

In addition to prices, Steel Market Update continually monitors lead times for deliveries of spot orders from mills. Lead times are a leading indicator of steel demand – the longer the average lead time, the busier the mills, and the less likely they are to discount prices. Lead times have never been more extended in the decade that SMU has been gathering this data. The average lead time for hot-rolled in May was nearly 10 weeks, and for coated products was around 12 weeks – more than double what is typical. The scarcity of supply has pushed lead times for spot orders well into July and August, making it difficult for service centers and manufacturers to acquire enough stock to sell.

Inventories among U.S. service centers remain extremely low. Steel Market Update’s proprietary data at the end of April showed the average service center carrying less than 41 shipping days of supply. April inventories represented 1.94 months of supply on average, or more than six inventory turns per year. Industry wide, inventories are extremely lean. 

Service center executives tell SMU that lead times are so long, and there are so few tons available on the spot market, they are having difficulty meeting even the basic needs of their best customers. Many report they have had to turn down business from less frequent customers because they simply can’t find the steel to sell them. 

Steel price tags can’t stay at record highs indefinitely. Supply will eventually catch up with demand. What happens then? Will prices see a sharp correction or a gradual decline? 

Nearly all the service center and OEM executives responding to SMU’s polls to date have predicted steel prices will experience a gradual decline over the coming months. Analysts at SMU’s parent company the CRU Group, on the other hand, maintain the market is in for a sharper correction sometime later this year. They think supplies will increase as idled capacity is restarted, as new production comes online and as more imports arrive. And they think that additional supply could collide with slower inventory building and lower automotive sales. The result: steel prices will return to their historical cost-plus model rather than being determined by a supply deficit, they predict.

There’s no way to know for sure which scenario will play out. But a correction of even a small percentage translates into large dollars when steel costs more than $1,500 a ton. Caution is warranted despite an economy that’s booming with billions – and perhaps trillions – more in government infrastructure spending on the way. Remember, the higher prices fly, the harder they can fall.

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Call-out:
Steel Market Update’s proprietary data at the end of April showed the average service center carrying less than 41 shipping days of supply. April inventories represented 1.94 months of supply on average, or more than six inventory turns per year. 


Author Bio:
Tim Triplett is executive editor of Steel Market Update. SMU’s mission with its newsletters, website, conferences and educational programs is to inform, educate and motivate those in the flat-rolled steel industry. For more information, visit www.SteelMarketUpdate.com.


Caption 
The dramatic uptrend since last summer shows the relationship between hot-rolled lead times and prices, which are both at record highs. (Steel Market Update data.)