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Flat-Rolled Report

Is This the Bottom?

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MCN Editor Dan Markham The steel supply chain hopes the pricing slide for hot-rolled coil has run its course. 

Members of the flat-rolled steel supply chain could be excused if they’ve forgotten just what an ordinary year looks like, given the spectacular whipsawing that’s taken place over the past two years. 

In the days since the pandemic, the steel world experienced a near total shutdown in production. That was followed by an unexpectedly rapid increase in demand, one the production community was not equipped to handle. 

Prices skyrocketed, the cost of hot-rolled coil topping out at almost $2,000 in 2021. A rather lengthy slide followed, though one interrupted in late winter with the tragic invasion of Ukraine by Russian forces. But the blip could not overcome the fundamentals, leading to even more price erosion entering the fourth quarter. 

So what’s to come? How about a return to a bit of that elusive “normalcy?”

“The last year and a half was unsustainable,” veteran steel analyst Timna Tanners said at the SMU Steel Summit. “Prices should be reverting to a more normalized level.”

That assessment was shared by Josh Spoores of CRU. “We expect steel prices to return to a more historical spread over costs,” he said at the same event. “Our view forward for key steelmaking raw materials looks pretty flat compared with historical levels.”

Specifically, Spoores and CRU were calling for an HRC average price of $760 in 2023, with cold-rolled pegged at $940 and galvanized at $1,020. 

Tanners, now with Wolfe Research, had a nearly identical prediction, suggesting hot-rolled coil will cost approximately $750 on average each of the next two years. Her projections for cold-rolled and hot-dipped galvanized were also in line with Spoores’ forecast. 

Perhaps just as important as the average is how the industry will get there. Two months of $1,000 and two months of $500 will get an average of $750, but that’s not what the analysts are projecting. CRU, for instance, forecasts HRC to trade within a fairly narrow band between $700 and $800 next year. 

Though hot-rolled prices have obviously “collapsed,” as John Anton said at CRU, the nice thing for the steel sector is his belief there’s not a lot of room remaining to fall. 
“There isn’t a lot of downside risk left,” said Anton, an economics director for IHS Markit.  

At least that’s how he sees it on coil, advising buyers that it may be time to lock in pricing for HRC. On the other hand, the bottom for cold-rolled or galvanized is likely to come closer to the end of the year. 

While her forecast calls for a similar average price for HRC as her colleagues, Tanners believes her long-held prediction the increase in domestic capacity was going to have a calamitous effect on steel pricing is starting to materialize. Though the pandemic and its aftereffects produced the opposite result, “this is the scenario we’ve been talking about, that new capacity is starting to affect the market on the steel side,” she said.

Though pricing may have little downside risk, that’s not true of the overall steel sheet market, Spoores said. “There are some indices that are really low, some of them at their lowest point since the depths of the financial crisis.”

Among the negative trends, Spoores said, was apparent steel consumption likely falling into negative year-over-year numbers in both the third and fourth quarters; mill shipments flat against a ramp-up in capacity; service center inventories at 17 percent higher levels than the year-ago period. However, he did note that service centers seemed to be in the process of correcting their stock levels. 
Furthermore, while the infrastructure spend is obviously going to help prop up overall steel demand, Tanners cautions that rebar and other long products, rather than sheet, will be the beneficiary of the government largesse. 

End Market Focus
The semiconductor shortage of 2021 was not, despite significant attempts at wishcasting, solved in 2022. The result was an even larger drop in automotive production and sales this year than when the supply chain issues first materialized last year. 

According to Bernard Swiecki, director of research for the Center for Automotive Research in Ann Arbor, Mich., total light vehicle sales in the first half of 2022 were down 17.4 percent, with light trucks down 15.1 percent and passenger car sales off 24.9 percent. Those declines were driven by still-low levels of carmaking, though production began to show a modest trend upward starting in April.

All of this has led to new vehicle inventory levels reaching their lowest levels since October 2009, Swiecki said. 

The market will begin to shift into more positive territory next year, CAR expects, though it will remain lower than consumer demand would support. Swiecki’s forecast calls for 16.3 million light vehicle sales in 2023, followed by sales of 17 million units or above each year through 2030. 

“There’s a slight uptick in semiconductor [production],” he said, noting the shortage was exacerbated by the pandemic’s push to so much at-home work, driving demand for chip usage in laptops and tablets. “What we’re hearing is demand is returning to more normal levels. There are more chips to go around for automotive.”

Construction is another major end market for sheet products, and the story is decidedly mixed there. While total construction spending in June compared with the prior year was up 8 percent, much of that total was gobbled up by rising input costs, noted Ken Simonson, chief economist for the Associated General Contractors of America Association. 

The biggest gains in the past year were in commercial construction, including warehouse building, retail and farm; and manufacturing, led by the aforementioned spike in spending on microchip processing facilities. Lodging and electric power were among the biggest laggards.

Looking ahead, Simonson sees a slower rebound in construction due to uncertainty about future costs, ongoing supply challenges leading to more deferrals and the matching government spending programs in the infrastructure and Inflation Reduction Act funds slow to get funds to individual projects.

He says the greatest prospects remain in manufacturing and data centers, plus renewable energy, while warehouse building and multifamily structures are at the biggest risk of slowdown. 

“There’s a mix of decline and growth,” Simonson said. “That’s the story for construction. The overall leading indicators are still signaling growth, but you have to be cautious.”

On the energy front, Frank Frederick, vice president of customer experience for Minnesota Power gave the steel supply chain some room for unguarded optimism. Over the next 15 to 20 years, renewable sources will go from producing 20 percent of our energy needs to 40 percent. Frederick called this shift one from “emissions-intensive energy to materials-intensive energy,” a transformation that steel is perfectly positioned to capitalize on.  

Whether the technology is geothermal, bioenergy, solar, hydro or other forms that don’t generate the same levels of CO2, steel is crucial to the process. “There is two to three times the amount of steel in a wind or solar plant than a coal or natural gas plant,” Frederick explained at the Steel Summit. 

View from the Service Centers
For two service center executives, the outlook can be described as nothing special, but nothing rancid either. “Our business has remained steady, but it’s definitely shipping on the lower side,” said Matt Simone, who heads up business development for Flat Rock, Mich.-based Target Steel. “There’s been a little bit of a slowdown in volume.”

“Demand is OK,” said Steve Gottlieb, president of Ratner Steel, Roseville, Minn. “The weakness is where we don’t service,” noting nonresidential construction and automotive as the stragglers. 

Target Steel is involved in automotive, a natural fit given its Detroit-area location. And, consistent with Swiecki’s forecast, Simone believes the tough times of the past two years will begin to get reversed next year. “On the automotive side, we kind of see things starting to pick back up.”

For Gottlieb, the supply chain’s health is predicated on the consumption of steel products. “Our main worry is always demand. We need demand to stay where it is or all of a sudden you’ll have a lot of service centers chasing fewer opportunities,” he said. 

Robust demand can hide a lot of ills. Even if the price continues to drop, for instance, the ability for service centers to turn over their inventories will generally protect the industry from too much harm. 

Both executives agreed with the SMU panelists on the pricing direction, based on their own experiences and conversations with mill partners. “They think it’s going to stay stable where it’s at,” Simone said.
And Gottlieb doesn’t believe there’s a lot left on the downside. “When you approach mill breakevens, that’s as low as they’re willing to go on spot,” he said. 

One overlooked fact, Gottlieb said, is the market isn’t really in an oversupply mode. While some notable projects have ramped up or have come online in 2022, including Steel Dynamics’ Sinton plant and North Star BlueScope’s expansion at Delta, Ohio, other producers have quietly or not so quietly taken some capacity offline. 

“There are a couple of mills with lead times increasing. NLMK is going to be down a month, Calvert has an outage. There are going to be outages at Nucor and U.S. Steel taking down a furnace at Granite City, one in Indiana and one at Mon Valley. SDI is still having some issues at Sinton and there’s less import coming in,” he said. “You believe there’s so much mill supply, but it’s not as bad as you would think.” 

Inventory levels were up 17 percent over the same period in 2021.  (MCN file photo)