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Steel Summit Report

It's All About the Price

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MCN Editor Dan Markham Steel analysts see major correction coming, while industry players are far more optimistic the pricing slide will be more gentle. 

One way or another, almost every conversation at August’s Steel Summit turned back to pricing. 

From the forecasters to mill executives to scrap market players, the wild ride of carbon flat-rolled in 2021, and its outlook for 2022, took center stage at Steel Market Update’s annual event, which returned to in-person attendance in its Atlanta home. 

In one sense, virtually every participant was certain the price of the material had only one direction to travel, south. The question then became just how far, and how fast, that drop would materialize. 

The answers broke down rather neatly into two camps. The leading analysts, CRU’s Josh Spoores and IMS Markit’s John Anton, anticipate a rather steep decline in 2022. In contrast, the steel industry’s direct participants, steel mill executives, raw material suppliers and steel purchasers, believe a more gentle decline landing at a still-high, but more manageable, number is the scenario likely to play out over the next 12 months. 

Spoores and Anton kicked off the price talk, each noting a slew of indicators that point toward a major price correction, with some mitigating factors that could keep the high price supported longer. 

The facts suggesting a decline is in the offing include evidence that supply availability has increased, both from domestic mills and foreign producers; service center inventories have gotten in better balance; a higher than normal amount of material on order; and sheet production outpacing demand. On top of that, by the first quarter of 2021, five million tons of EAF production will be added in North America, with Steel Dynamics, North Star Bluescope and Nucor projects starting up in the U.S., while Mexico adds new mills from Ternium and ArcelorMittal. That new capacity represents a 9.5 percent increase in production over 2019 levels. 

“In our base-case scenario, prices today are at record highs due to the supply deficit. As the deficit eases via increased domestic production, rising imports, less demand from inventory building and the start-up of nearly 12 million tons of new North American capacity, sheet prices will revert back towards a cost-plus relationship,” Spoores said. He noted that similar run-ups and falls have already been seen in other commodities, such as lumber, iron ore and some petrochemicals.

In CRU’s base case, the price for HRC will drop back down below $700 by the middle of 2021. 

However, Spoores said a few factors could continue to prop up the price, including further unplanned supply disruptions; if China puts additional restrictions on exports; Russian export tax issues, if demand for sheet products is boosted by new stimulus efforts; and if a significant increase in demand from the energy markets emerges. The high end of the CRU price forecast is approximately $1,100 per ton by mid-2022. 

Anton’s presentation, “Bubbles Pop. They Always Do” gave away his expectations immediately. He noted a different set of factors pointing toward the price decline, including how long products are more closely reflecting input costs, an improving global supply picture, stagnating demand picture for most major end markets and improved deliveries. 

Anton’s forecast for hot-rolled coil is for the price to decline to $1,200 per ton by the second quarter, then dip to $750 by the end of the year. 

Among the threats to his price forecast are delays at the ports, curbing imports; Chinese production cuts in advance of the Winter Olympics; and availability issues with electrical steel. Trade policy changes and Chinese demand remain wildcards that could push the price in either direction.

But just as Spoores and Anton pointed to the indicators that portend a major drop, industry executives offered credible reasons why the drop will be more gradual, and come to a rest at a higher new floor. 

“I don’t think it will drop precipitously. There are so many other factors that will mitigate this. You have blast furnace consolidation. The market is in better balance. There will be a drop, no question, but it will be a reasonable drop,” said Barry Zekelman, CEO of Zekelman Industries while speaking on a manufacturing panel. “The new norm won’t be $600 to $700 per ton The new norm will be higher.”

Olympic Steel CEO Richard Marabito also expects a more gradual decline from today’s highs, based on a number of significant trends. Demand is good and supply chain disruptions that have limited availability will likely pull much of that demand forward into the new year. Also, those supply chain issues will put a limit on speculative import buys, which often push the price downward, the head of the Cleveland-based service center company said. 

Perhaps most important, he said, was simply the new way of doing business by the North American production community. “We’re living through a major restructuring of the domestic steel industry on multiple fronts. COVID really masked a little of what happened with Cleveland-Cliffs,” he said. “Historically over the last 30 years, earnings in our industry have been a roller coaster. Over 30 years, especially in the mill environment, you have to earn your cost of capital and reinvest. We’re seeing that happen. And as that goes forward, I think we’ll see a much more stable environment and a higher level of pricing than what we’re accustomed to, and I think that’s good for everyone.”

One thing all three executives on the panel agreed upon is the current pricing environment is not good for the long-term prospects of the metals sector, even if it’s doing wonders for the producers’ earnings. 

“This pricing is not healthy. If you look downstream at smaller manufacturers, the people who make up a large percentage of downstream manufacturing in the U.S., they’re struggling,” said Chris Shipp, vice president of supply chain for Priefert, a Texas-based manufacturer and service center company. “They can’t get higher credit lines. It’s a huge challenge today.”

Zekelman agreed. “You’re not going to sit here two years from now with steel at $1,800 per ton,” he said. “If it is, we have real problems. The market is going to vaporize unless we can be globally competitive.”

Between the analysts and the buyers, steel mill executives Lourenco Goncalves of Cliffs, Leon Topalian of Nucor and Mark Millett of Steel Dynamics were queried by host John Packard on their thoughts on pricing. Though, wisely, none of the CEOs was willing to pinpoint where the tags on steel will sit next year, they generally fell more in line with their customers’ expectations than with the industry observers. 

The same was true for the audience. As is tradition at the Steel Summit, attendees also get a say in pricing predictions, as the in-person guests and online watchers are polled. 

A majority of those who answered believe the average price for HRC in 2021 will sit between $1,000 and $1,499 next year. 
 
Automotive: A “Short” Story
The automotive market is in the throes of an unprecedented market condition. Consumers want to buy new vehicles. The automakers simply can’t make enough of them. 

The primary, but not only, culprit is one of the smallest elements of any new vehicle, the semiconductor. It’s a problem that has existed throughout most of 2021, and will persist well into 2020. 

“The thing that gets all of the attention is the semiconductor,” said Bernard Swiecki, director of research for CAR, the Center for Automotive Research. “But we’re also facing limitations on petrochemicals, rubber and rare earth materials. If there was no semiconductor shortage, we would be concerned about those others.”

That is leaving cars sitting on producers’ lots, waiting for the necessary raw materials to complete the assembly process. 

“It’s not consumer demand. Inventories are low, and we’re not producing as much because we can’t get all we need to build these cars,” Swiecki said. 

The dealer inventory levels tell the horrifying story. The auto industry prefers to have about two months’ worth of inventory at any time. In late August, that number was three weeks. 

The shortage is very likely to continue into the second half of next year, as the lead time to increase global capacity in semiconductor production is years, not months. 

The rationing of the product has led the automakers to prioritize high-dollar vehicle production, where their margins are greatest. The average transaction value in 2021 is $41,000, an all-time high. CUVs have made up 41 percent of sales this year, followed by pickups at 17 percent and small cars at just 9.3 percent. 

The big story, however, is the continued gain in electrified vehicles, which has nearly matched the small car share in 2021 with a capture of 8.7 percent of the market. 

“Electrification is having a moment. Consumers are much more accepting of these products now. The regulatory environment is not that geared to pushing these vehicles, but there is an expectation with the next few bills around Congress,” Swiecki said. “There is investment in infrastructure in charging of EVs, and in the boonies, not just cities. The technology is mature; you don’t have to pay as much of a premium as you did in the past. Wall Street now loves green companies.” 

Where electric vehicles, which encompass all types, including battery-electric and hybrids, go from here remains to be seen. While some critics contend the government won’t hold automakers to the commitments they’ve made, others note that most of the automakers’ existing pledges are voluntary and likely to be met. “Prior company announcements and industry forecasts show automakers are already on a likely path to achieve compliance by 2030.”

That leaves consumers. “Will we have enough consumers embrace them to get to 50 percent of the market? We don’t know,” he acknowledged. “But 87 percent of investment that CAR tracks in automotive have been for something electrified. It is happening very quickly.”

Nonresidential, Industry Laggard
While many major end markets for steel products have enjoyed a robust 2021, that isn’t the case for nonresidential construction. A market that often lags the conventional economic cycle, most private and public works spending on major projects has been soft this year. 

The bottom may be near, said Ken Simonson, chief economist for the Associated General Contractors of America. “I think the nonresidential side is probably close to its low point. A couple of indicators suggest things will get better in the next few months.”

Simonson noted the Architectural Billings Index, the Dodge Momentum Index and multifamily housing permits were all trending in the right direction. The AIA’s index is particularly strong, coming in at 57.1 percent compared with just 40.7 percent a year ago. 

The nonresidential slowdown has largely been across the board, Simonson noted. 

Education, office and lodging were all down double digits, while declines in power, commercial, highway and street and commercial building were all above 5 percent. Overall, private nonresidential spending is down 25 percent in 2021, while public works spending was off 7 percent. 

Even health care was not immune. Though hospital spending is up 3 percent this year, medical buildings and special care spending was down, pulling overall spending down 3 percent. Simonson expects that trend to reverse, however, with more investment outside of hospitals in the next cycle. 

Other areas of potential growth include public schools, as COVID-related spikes in suburban living will spark a need for more facilities; manufacturing to meet greater demand as supply chains adjust to recent hiccups; and investments in greener energy technology, such as wind and solar and the transmission networks that accompany them. 

In contrast, higher education spending is looking poor for a while as colleges are low on cash from a lack of student funds and the loss of many full-paying foreign students. Office buildings will also be slow to return. 

Compromising a rapid rebound is the ongoing material price issue. While lumber has largely reverted back to pre-pandemic prices in recent months, other inputs remain at historically high levels, especially commodity metals. 

“The biggest concern for contractors  these days is materials cost and availability. Input prices have gone up 25.6 percent over the last 12 months,” he said. “And the bid price index was dead flat through 2020, risen only 4.4 percent over the last 12 months. The pain they’re experiencing through  higher costs are not being recovered in their bid price.”

The availability of materials is compounded by a scarcity of construction employees. COVID-19 has been notably hard on the industry. “Construction workers have low [vaccination] rates and high hesitancy,” he said. “It’s difficult for contractors to get an entire workforce on site.”