Current Issue

Service center inventories have built over the past few months, so some distributors are looking to pare down stocks by year’s end. (Photo courtesy Kloeckner Metals)

Let the Good Times Roll

North American mills experienced banner year for hot-rolled material in 2018

By on
Despite some recent softening, the domestic hot-rolled steel market has been quite robust this year. From the steelmakers’ perspective, it could be the best year in the past decade. 

“This year was the most fantastic year for hot-roll that steelmakers could imagine,” says John Anton, associate director of IHS Markit’s pricing and purchasing service.
Despite some potential headwinds, particularly on the trade front, most believe 2019 will likely be another strong year. Steel-Insights LLC President Becky Hites is among them, predicting the market will be bolstered “as manufacturing in the United States moves back into vogue.”

While U.S. apparent steel consumption was down 1 percent in the first half of 2018, compared with 2017, hot-rolled coil defied that trend. HRC consumption was up 19 percent year over year through July. The increase was boosted by mills supplementing their in-house production capacity by bringing in HRC from overseas to feed cold-rolled and hot-dipped galvanizing lines. “We are also seeing that with the importing of semi-finished goods, including slabs, by rerolling mills,” says Amy Bennett, principal consultant with Fastmarkets MB.

While it has clearly been bolstered by the U.S. economy, a number of other factors have resulted in a solid hot-rolled steel market this year. Imports have declined as hot-rolled customers try to figure out purchasing strategies in light of Section 232 and other government actions, says Philip Bell, president of the Steel Manufacturers Association. 
Anton doesn’t believe the current rate of growth will be sustainable long term. He says the U.S. economy and many hot-roll end-use markets are currently on a “sugar high” from the corporate tax cut passed late last year. Rather, U.S. GDP growth, which jumped up to 4.2 percent for the second quarter of 2018, could remain under 2 percent in the coming years, he said.  

There have been some signals the hot-roll market is going from very hot to a bit more tepid, says Lisa Goldenberg, president of Delaware Steel Co., Fort Washington, Pa. The most obvious sign is the recent softening of HRC prices, which had fallen about $100 to $815 per ton as of mid-October after peaking in late July. Opinions vary whether the recent $40 per ton price hike led by Nucor and followed by several other major hot-roll producers will be accepted by the marketplace. 

Anton says the motivation for the mills is very clear, especially while they are in the middle of negotiating 2019 contracts with their major OEM customers. They’d like to stop prices from falling further by saying they are actually going up. He doubts this price hike will stick and predicts that, given the market fundamentals, domestic HRC prices could actually come down further despite the support from tariffs and quotas. “It is possible that they could pause for a little bit at current levels, but after that they will likely start falling again.” He expects the price will eventually settle as the import price plus 25 percent, sometime in the second half of 2019. 

Others, however, say the price hike could be more successful, especially if it is followed by a second round of price increases. Chris Billman, research manager of Cleveland-based Majestic Steel, expects such an increase before the end of the year. If that does occur, domestic HRC prices could move back up to about $860 to $880 per ton by mid-December, or at least by the beginning of next year. 

There are multiple unknown factors that could determine the ultimate direction of HRC prices. This includes the question of the longevity of Section 232 tariffs – especially those for imports from Canada and Mexico. Tariffs from those countries remain in place despite the revamp of NAFTA, now the United States, Mexico and Canada Agreement, which is expected to be formally approved by the three countries by year’s end.

Also, contentious labor negotiations continue to linger between the United Steelworkers and the major integrated producers, though a tentative agreement was reached between U.S. Steel and the union shortly before MCN went to press. Though the USW has given the go-ahead to strike against the steelmakers, most industry observers don’t expect there to be any kind of extended work stoppage. 

“I can’t imagine that company executives would allow their mills to shut down when they are selling hot-roll at these prices,” says Craig Mathiason, president and COO of Jemison Metals, Birmingham, Ala. That gives the union a lot of leverage. “It is in the USW’s best interest to make the negotiations as scary as possible, but at the end of the day I don’t think there will be a strike.” Bennett agrees, although she says the mills might need to give away more than they would like to prevent it from happening. 
With domestic hot-roll capacity utilization estimated at 90 to 95 percent, which is basically full capacity, even a short strike – just a few days long – would result in supply tightening up and prices going through the roof, Goldenberg says. 

Recently, there has been some tempering of service centers’ orders of hot-roll, says Tony Hammes, vice president of supply chain management for O’Neal Flat Rolled Metals. That isn’t because end-use demand has weakened. In fact, it is continuing to grow by a high single-digit, year-on-year rate. It has more to do with distributors’ desire to keep their hot-roll inventories lean. Stocks had been moving up over the past three or four months. 

“This has a lot to do with the performance of the domestic mills, who have been catching up with their orders over the past 60 days or so,” Hammes explains. While mill lead times have come in slightly to about three to six weeks, the biggest impact is that the steelmakers, who didn’t have a lot of spot availability for much of this year, have started to develop some pockets of spot hot-roll availability in their October and November production schedules. 

There are also other reasons service centers are looking to prune their inventories to under two months of supply from the 2.5- to 3-month levels that they are currently holding, says Jim Barnett, chairman and CEO of Wixon, Mich.,-based Grand Steel Products Inc. With the end of the year approaching – a time of the year when service centers like to have less stock on hand – and with HRC prices having fallen, there is a lot of concern of being caught with high-priced inventories. This has resulted in an increase in orders being placed through service centers by other service centers rather than through mills. 

Underlying hot-roll demand remains quite strong, driven by the energy sector. Other important end-use sectors, such as automotive and construction, have been more tepid, though at a decent level. 

Hammes cautions the energy sector remains a “fickle” market, responding quickly to changes in prices and therefore difficult to anticipate where it is headed. But as long as oil prices don’t dip below $50 per barrel, which is not anticipated any time soon, there should continue to be strong demand for hot-roll used in oil country tubular goods to build, repair and expand oil refineries. 

On the auto front, production has tailed off from the all-time peak of 17.9 million light vehicles in 2016 to somewhere between 16.8 and 17.2 million cars expected to be made this year. Despite the decline, SMA’s Bell says the market will still be a positive for hot-rolled and other steels given the continued shift toward light trucks, which use more steel per vehicle than passenger cars. He says advanced high-strength steels are also making greater inroads with light trucks and SUVs in the effort to take weight out of the vehicles. 

“I think the bloom is off the rose for lightweighting vehicles by switching to aluminum and other competitive materials,” Grand Steel’s Barnett says. “One reason is the cost differential. Also, the Trump administration hasn’t put the same emphasis upon fuel efficiency regulations, so automakers are less likely to add cost through lightweighting than we thought previously.”

While it could lead to some increased demand for hot-rolled steel, Bell says it is still somewhat uncertain how much the impact of the expected regulatory rollback of U.S. fuel efficiency standards will actually be. Anton does not expect it to be very significant given that automakers tend to make one platform for the vehicle models they produce globally and that other nations remain highly committed to increasing fuel efficiency and reducing the greenhouse gas emissions of their vehicles. 

Hot-roll use for other transportation sectors, particularly heavy duty trucks, truck trailers and railcars, has been strong and growing. Jeff Simons, O’Neal Flat Rolled’s president and CEO, says lead times for Class 8 trucks are running in the eight- to nine-month range and truck trailer production is strengthening. This comes as heavy duty truck orders jumped 108 percent year to date through July, and orders for truck trailers moved up 28 percent over the same time period, CRU Group reports. 

Simon says during the economic downturn truck fleets had been run longer than normal. Now with the strong U.S. economy and the increased freight activity that accompanies it, plus new truck driver hours of service rules and more stringent environmental standards coming down the pike, companies are looking to replace the older trucks or to expand their fleets. 

The new hours of service rules have also encouraged some companies to increase their inventories of trailers. Hammes explains that this allows them to “deadload” trailers so that truck drivers can just drive in and drop off or pick up freight as opposed to making them consume hours while they are waiting for trailers to be loaded and unloaded. 

The other major end market, construction, “is the big elephant in the room,” Barnett says. Anton says nonresidential construction is showing just modest growth, as brick and mortar retail building has been limited by the growing popularity in internet purchases. According to the U.S. Census Bureau, total U.S. construction spending was up 6.5 percent year on year in August, including a 4.8 percent increase for private nonresidential construction.

There are mixed messages about what will happen going forward. The American Institute of Architects’ Billings Index rebounded to 54.2 points in August from 50.7 points in July. At the same time, Barnett observes that steel studs have been taking some market share of the construction market from lumber. But Dodge Data & Analytics reports the value of new U.S. construction starts fell 9 percent month on month in August, the second straight month of decline.

Imports had initially fallen due to Section 232 but could be coming back again, supported by the still-elevated U.S. HRC prices. The latest Commerce Department license data indicates HRC imports jumped 35.2 percent month over month and 55.9 percent year on year in September. This, Fastmarkets MB’s Bennett says, is because even with domestic prices falling and adding in the Section 232 tariffs, the differential between domestic and foreign prices is incredibly wide – $100 to $150 per metric ton with Europe and $150 to $200 per ton with China. 

While HRC imports might be worth the risk at that price when going to coastal destinations, Hammes says they are less attractive when transportation costs to inland locations are added to them, especially with the potential of further slippage of domestic prices. 

Though domestic hot-roll supply isn’t terribly tight at the moment, Bennett says there could be enough demand for the new capacity that has come online or announced, as long as imports don’t get too high. That’s because the U.S. hot-roll market tends to be short of supply. Also, Jemison’s Mathiason points out that the mills’ moves to make more value-added products has taken some hot-roll availability out of the market as they convert more of their own hot-roll into cold-rolled, galvanized and painted steel.  

In addition to U.S. Steel restarting the two blast furnaces at Granite City Works idled since 2015, JSW Steel is not only ramping up hot-roll production at its Mingo Junction, Ohio, mill it acquired from Acero Junction in May, it is planning to restart the electric arc furnace there idled since 2009.

“There have been a lot of announcements of further capacity additions, although it remains to be seen if they will actually come online,” SMA’s Bell says. Delaware Steel’s Goldenberg says such announcements could be premature given that it is still uncertain what impact recent capacity additions will have upon the market.