The auto shutdowns put the brakes on activity in the spring, but demand has rebounded nicely for the North American sheet market.
The speed at which the carbon flat-rolled market dropped into the abyss in the spring was not quite matched by the velocity upon exit, but it wasn’t as far off as many expected.
When the coronavirus shuttered business activity across North America in late March, most notably the automotive industry, the sheet steel market had no choice but to follow suit. Yet even as the country struggles to regain its economic footing following that virus-induced crash, the flat-rolled market has demonstrated remarkable giddy-up.
“April was down about 35 percent. May rebounded to about 20-25 percent of March, June was 10 percent and July and August were back to March levels,” says Steve Gottlieb, president and COO of Ratner Steel, Roseville, Minn. “We’re not complaining, It’s much better than anyone anticipated back in March. It’s come back much faster.”
Fellow flat-rolled specialist Heidtman Steel, Erie, Mich., saw an even bigger drop, says CEO Tim Berra. His company, with more than 50 percent exposure to the auto market, lost about half percent of its volumes at the worst of the recession. “Each month, we’ve come back a little. As we sit here today, we’re probably about 5 percent down pre-COVID.”
The story is the same throughout the flat-rolled supply chain. COVID decimated the industry in the second quarter, resulting in furloughs and layoffs, but demand destruction was short-lived. That doesn’t mean conditions are entirely rosy. Demand has returned in pretty rapid fashion, but supply isn’t quite where it needs to be to meet it. “We’ve gone from a situation where there was uncertainty on the ability to sell,” says Mike Lerman, president of Steel Warehouse, South Bend, Ind. “Now there’s uncertainty on the raw materials.”
Lerman says Steel Warehouse purchasing people are looking everywhere for material, trying to keep their facilities flush with metal. The same is true for Berra.
“The mills went down to some really low capacity utilization levels to get the supply side matched up with the demand levels. They’ve come back, but they’re still only at 65-68 percent capacity utilization,” Berra says. “We’re not getting the steel we need to support the requests from our customers.”
Those requests are coming from pretty much everywhere. Obviously, automotive has rebounded from its shutdowns, and is now in a furious game of catch up. The 6-week or more idlings of assembly plants across the continent have left auto lots largely empty of new models.
In early October, it was estimated only 3 percent of the expected inventory of 2021 models had reached dealerships, and it will be a long time before it gets back to where it would normally sit. Nonetheless, the auto builds have accelerated. They won’t reach the 17 million units of the peak period pre-COVID, but they’re already moving into more acceptable territory despite the setback.
Moreover, the push toward more steel-intensive light trucks and other larger vehicles continues without pause. Metal Strategies’ Chris Plummer says light truck share is now reaching 78 percent of the total market. “That is offsetting the majority of the decline in unit output. There’s very little decline in light trucks, particularly pick-up trucks, which are three of the top four or five vehicles in NAFTA by unit.”
The gains could come faster if the raw materials were there to support it. Berra says it’s not just an absence of steel getting in the way of even greater gains, but a lack of manpower. “There’s a completely different set of challenges now that demand is back, and that’s figuring out how to satisfy the demand via supply and manpower,” he says.
The conditions are exacerbated in that many of the markets for flat-rolled steel are performing at strong levels, much to the delight of some supply chain members. “It’s pretty boomy out there,” says Jim Lehr, COO for Rosemont, Ill.-based Coilplus.
Lehr says one of the most active markets, for obvious reasons, is heating, ventilation and air conditioning. “When you’re home all the time, if your AC isn’t working, you’re going to go out and buy a new air conditioner.” His company supplies two of the four major HVAC companies, and Coilplus “can’t keep steel in supply; it’s that busy.”
The same rationale, plus others, could be behind strong trends in the appliance market. Home-bound Americans are more attentive to keeping appliances in top shape. On top of that, low interest rates have made for a good real estate market, which always translates into strong sales for refrigerators, dishwashers and dryers.
“Appliance is hot,” says Bill Douglass, president of Chicago-based Lex Steel. His company was recently acquired by UPG Industries. Douglass will now be in charge of both Lex Steel and UPG’s Maksteel, which operates in the eastern half of the United States.
Nonresidential construction has remained fairly strong throughout the pandemic. “Warehouses, manufacturing facilities like steel mills themselves, they’re using galvanized for pre-fabricated buildings and roofing. It’s also used on highway road signs. That works out to one of the bigger markets for sheet steel, and they’re doing relatively well compared to others,” Plummer says. But Lehr has his concerns about how long that will last. He says there was a good mix of projects that had been started pre-COVID, and those efforts have continued forward. But he’s less optimistic that new starts are forthcoming. “Projects that have been greenlighted are being built, but other cap ex is being put on hold. The problem is what’s in the pipeline.
“Nonresidential construction is an area of concern, but it’s the only one of the major markets we’re in that worries me,” he says.
For Lerman, the biggest surprise has been the growth he’s seen in the truck/trailer market, particularly given where it had been heading. “It started very soft, and that turnaround really surprised me.”
He also pointed to ag equipment, which is a market that had been soft for several years.
According to data from Metal Strategies, ag is the big winner among end markets, with year-over-year shipment increases of 13 percent, pandemic be darned. It’s the only major end market that has experienced increased shipments compared with 2019, though all of the other markets Metal Strategies follows have been on the upswing since the second half started.
The one outlier, of course, is the oil and gas market. The energy sector started to soften before the pandemic, though the limitations on travel since the lockdowns have compounded the problem, with no real end to the issue in sight. “The one market that is lagging is oil and gas, no surprise,” says Marc Lerman, vice president of purchasing for Steel Warehouse. “We play in that market, and while I wouldn’t say it’s gotten worse, the market certainly isn’t good.”
While the current trends are encouraging, the conditions now won’t be enough to offset the damage that has already taken place. Plummer says U.S. producer shipments of sheet totaled 59 million tons in 2019. This year, he expects a year-over-year decline to under 50 million, or about 20 percent.
But the downturn will be relatively brief. Over the next three years, Plummer anticipates consumption of steel sheet products in the U.S. to average just about what it did over the course of 2018-19, an uneven period given the implementation of tariffs and run-up in purchases in 2018 and the inventory overhang that carried the industry through a large portion of 2019.
On the pricing front, while the mills took aggressive steps to pull back on capacity by taking some furnaces offline in response, it wasn’t enough to keep the hot-band price in place during the depths of the recession. However, the still shaky supply situation coupled with increased demand has allowed the producers to push through increases recently.
“They’ve been really aggressive on pricing. There are no year-end deals to be had, and they’re already into December. The million-dollar question is, ‘At what point are they going to come out of their low capacity and get back to 80 percent?’” Douglass asks.
When that happens, holding pricing will be a challenge. “And the other factor is, if they stay high enough, long enough, you’ll have foreign,” he says.
The rising prices were partly about demand, but just as much about the continued instability at the mill level. Several blast furnaces were idled going into the fall, while workers at NLMK in Pennsylvania remained on strike through mid-October. The looming question is what happens when this gets sorted out, which will also include the start of the second caster at Big River Steel.
“My worry is this continues to get elevated through the end of the year, then the mills get their act together and we’re beyond the outages,” says Gottlieb. “As a service center, it’s great on the way up and terrible on the way down.”
The supply concerns are plentiful, even before the surprising deal in late September where Cleveland Cliffs announced plans to acquire almost all of ArcelorMittal’s U.S. operations. The deal, coupled with U.S. Steel’s expected full acquisition of Big River Steel in the coming years, will ultimately leave the domestic flat-rolled market with only four major steelmakers. In theory, that will help deliver some greater control over supply and pricing to the producer community.
“I remember listening to Lakshmi Mittal about 10 years ago in New York say consolidation will lead to stability in prices. It really hasn’t happened,” Lehr says.
It’s not the only way reality conflicts with economic logic when it comes to steel prices.
“I ask every mill CEO, ‘With Section 232 in full force, how did steel prices fall to $380 per ton in 2019?’” he says.
Service center executives’ intimate familiarity with the up and down nature of steel pricing are wary about what happens early in 2021.
“I think we can see the next couple of months are going to be great, but there are some issues after that,” Gottlieb says.
Those issues go beyond pricing. “I don’t think you can put a series of events together to get a more uncertain time than we have right now,” says Marc Lerman. “Supply/demand, geopolitical, everything.” That everything includes a contentious presidential election that should be decided by the first week of November, though that’s hardly guaranteed. Chances are decent that a tight election could result in not just legal disputes, but protests that all in the industry hope don’t take a turn to violence.
Furthermore, should the presidency change hands, the industrial economy is looking at some possible reversals of policy positions, effecting the conditions businesses must operate under. Steel tariffs, tax law changes and increased regulatory actions could be seen under a Biden presidency.
Fortunately, given the other issues facing the U.S., it’s doubtful any of those matters will be the top priority.
“If there’s a change in administration, I don’t see that having any impact until mid to late next year,” Gottlieb says.
On the flip side, if Democrats sweep into office, hope for the long-awaited and much-needed infrastructure bill could be closer to reality, though the industry has seen those hopes dashed too many times in the past to be overly optimistic.
Of course, hovering over everything is the coronavirus, which was picking up steam again across the country as the weather turned colder. Almost every state was experiencing significant increases in case-loads, with some even starting to reinstitute measures designed to control spread.
How that plays out on the economy is anyone’s guess.
Berra says COVID-19 remains the “wildcard” but is also confident that another lockdown is not likely. “I think for the most part, people have learned to live with the current conditions. No matter who is in office, I don’t think the American people will let us lock down again.”
Rising demand and issues at the mills are making it harder to keep inventories full. (Photo courtesy Steel Warehouse.)