Flat-rolled steel analysts see several warning signs ahead.
For the flat-rolled steel market, the primary product of most service center operations, the year to come has a very different feel than the recent past.
After two years of high prices and robust demand, worries abound for distributors as 2023 dawns. Declining prices, softening demand, recessionary fears and interest rate hikes are just a few of the factors leading to a much more cautious approach to the new year.
Leading steel market analysts anticipate some challenging times. “We think it will get worse before it gets better,” said Philipp Englin, CEO of World Steel Dynamics. “It’s a precarious situation; the market is trying to find the bottom as we speak.”
Michael Cowden, senior editor at Steel Market Update, had a similar take during an SMU webinar in late November. “The big question is whether the market is at the bottom or if we still have room to fall.”
U.S. steel mills tried to answer that question themselves in November and December, announcing several price hikes. Cliffs and U.S. Steel led the way with an announced price hike of $60 in late November, while in December Cliffs, NLMK USA and AM/NS Calvert announced $50 increases on hot-rolled, cold-rolled and coated products.
Cowden noted how Cliffs had attempted a similar move in August, announcing a $75 increase. That move “stopped prices from falling and they were modestly higher for about five weeks, and then resumed their slide. It remains to be seen whether we’ll see that pattern this time or if the prices will stick.”
This time around probably offers a little better chance to halt the slide, though not necessarily for the best reasons. While demand usually is a little stronger in the first quarter, which could buoy prices, the bigger reason may simply be there’s not left room to decline.
“Some mills at the lower prices were at or near breakeven, so need may be a more powerful motivator than greed,” Cowden reasoned.
Other factors working for pricing strength include a general destocking of inventories at the service center level, he effects of which may be starting to work their way into the market. “We’ve seen a slight uptick in the number of manufacturers saying service centers are raising prices to them. I think there’s a certain logic to that. At a certain point you hit the point of capitulation where the service centers are willing to support a price increase,” Cowden said.
Alas, not everything is pointing in that direction. “It’s going to be hard to enforce price hikes if buyers continue to say 95 percent of the mills are willing to negotiate lower,” he said.
Additionally, even if the U.S. or North American markets perform better than anticipated, that would likely leave them outperforming the rest of the leading global economies. Under those circumstances, it could be difficult to maintain strong pricing if other steel producers are looking at tremendously low prices at home.
Overall, it leads to a rather split market on pricing expectations among SMU’s clients. “People saying HRC will be below $600 in two months are about the same number as saying it will be above $700 per ton,” he said.
Wolfe Research’s Timna Tanners, perhaps surprisingly, is in the latter group, at least in the short term. She’s calling for HRC prices of about $775 in the first quarter, though with a bit of caution. “I think there is downside risk but not a lot of upside risk. But in the near term, prices will be up a bit.”
On the demand side, the story is also mixed. Two of the biggest markets are poised for strong years, while the rest of the users of flat-rolled products are looking at softer conditions.
Automotive is the most obvious candidate for a bump, as the industry has spent the last two years with an artificial constraint on production due to the inability to source many of the necessary components for production. Those conditions are expected to loosen this year.
“What’s very strange in this particular instance of a market downturn is you actually have automotive on the way up. It’s ramping up in activity. And oil and gas, as long as energy prices stay high, one can imagine that maintaining some positive momentum,” Englin said.
Tanners, who headlined the SMU webinar, believes the auto market will be a struggle between two competing factors. “Auto is going to be a tug of war between pent-up demand and affordability,” she said. “We think the auto companies are going to have to lower prices to get people to buy cars.”
Working against the auto segment is the fact that could limit all big ticket items, both by the consumer and the business sector – higher interest rates.
As Englin noted, the energy business should remain healthy in 2023, particularly if, as expected, prices surge in winter as Europe’s supplies are depleted. “International energy markets are poised for a big upswing, and if that happens, oil and gas here will do pretty well,” he said.
Hopefully, it will be better than 2022, which should have been a banner year for the energy sector given the historic increase in prices. It grew, but not to the levels it ordinarily would have reached.
“It did materialize, maybe not as strong as you might imagine because the publicly held drillers are still capital starved,” Englin explained. “The private ones went out and started pumping more. You could probably see some of the publics maybe come around again, and have a better year for OCTG for sure.”
But beyond those two, the forecast is decidedly more cloudy. Construction is trending downward, both on the residential and commercial sides of the equation. The one construction segment that is likely to see a 2023 boost is public spending, thanks in part to the infrastructure bill. But that is the sector that benefits flat-rolled steel the least.
“Everyone I talk to in commercial real estate says it’s just a blood bath,” Englin said.
The downturn in housing will lead to a corresponding weakness in the appliance segment. Similarly, a decline in food commodity prices may also negatively affect the ag market.
Overall, Fitch Ratings expects North American steel demand to grow in 2023 compared with 2022, though the company’s forecast includes all steel products.
But for many in the steel industry, the demand story isn’t nearly as interesting as the supply picture. That’s certainly true for Tanners, who has been anticipating a major downward push on the market with the onset of new flat-rolled capacity. For several years she pushed the idea of a “Steelmageddon” as a result of the onset of increased capacity, a condition that may finally be realized, she said. “This will coincide with lower demand in the second half of the year.”
New capacity is already ramping up at Steel Dynamics in Sinton and North Star BlueScope, with more coming on at Nucor Gallatin and Big River. Opinions differ on how well the North American market will be able to absorb this new production.
Tanners, of course, believes it will dampen prices immediately, particularly as other mills make a play for greater share. In the recent past, many mills have pulled back on production in a value-over-volume strategy, but their appetite for that discipline may be waning. “Cliffs is tired of holding back volumes to see other companies producing more. Steel Dynamics is running really hard and everyone else is running not so hard.”
Another method to dampen the effects of new capacity is for older production to come offline. But Tanners doesn’t believe there are many furnaces left that fit the typical “old and outdated” bill.
“If you ask a steel mill, they’ll say, ‘No.’ They don’t think any of them are crappy or they wouldn’t run them. And we did see over the last several years some of the low-hanging fruit come offline. That took out the poorest quality stuff, and what you have left is what mills don’t want to shut,” she said.
But Englin is a little more optimistic, believing the rough conditions could make it easier for the domestic mills to grab market share.
“We could have a situation where there’s a down market and a down year from a pricing perspective. It’s not out of the question that U.S. mills could gain a substantial chunk of share from imports because the supply is there and who wants to buy imports that have long lead times and are going to show up two to three months from now, but you have to commit to a price today,” he said. “Why buy foreign when you can buy four-week lead times from a domestic at essentially the same price with no risk?”
Tanners acknowledged the attractiveness of imports is not there. “The best thing we can point to right now is imports are unappetizing. As you look at the U.S. vs. Europe right now, they’re basically telling you there’s no reason to import from Europe. There’s also no reason to export to Europe.”
In addition, Tanners noted that running alongside the overall increase in flat-rolled production is a significant uptick in galvanized capacity, estimated at close to 5 million tons. “Either more is coming off or there is more galvanized demand than we know about.” [Caption:]
Steel coils at U.S. Steel’s Irvin plant, part of Mon Valley Works. (Photo courtesy U.S. Steel)