These are strange days for the US sheet steel market. While generally profitable for producers via the world’s highest prices, mills now face some serious challenges.
Prices for the market’s bellwether product, hot-rolled coil (HRC), have declined fairly steadily, from the 2014 high of $700 a short ton in early May, to as low as $635/st this week.
Transaction prices were heard to be as much as $30/st below this recent bottom for some higher-volume purchases. That puts some ex-works HRC prices closer to the $600/st psychological “floor” that the mills are hoping not to fall through.
HRC prices so far this decade have been as high as $880/st and as low as $530/st. Price swings are mitigated by the relationship between finished steel prices and mills’ raw material input costs, mainly for scrap and iron ore, often keeping profit margins healthy even as finished steel prices decline.
In addition to these natural checks and balances, US mills have exhibited a great deal of pricing discipline this year, even as mills in much of the rest of the world have struggled.
But the steady decline in key raw material prices over the past two months is not helping US mills convince their customers that the prices they are seeking are justified. Lackluster year-end demand and rising imports and inventories are also putting pressure on prices.
The positives for sheet mills include a somewhat surprising US government decision this month that puts prohibitively high antidumping duties on HRC imports from Russia, effectively removing some supply of cheap steel from market. Also, as winter weather gets its grip, scrap prices will likely rise, allowing mills to strengthen their steel prices. Furthermore, this year’s industry consolidation, which culled the US sheet-producing herd by three companies, is believed to be an overarching plus for the remaining steel firms.
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There are only two months left in 2014 and how the rest of the year will play out is now in contention. The upshot of the various market factors currently in play is the recent market chatter that mills are preparing to raise prices, even as prices are falling. The “Weak Market Price Hike” is longstanding tradition. It is designed to at least halt ongoing price cutting. This can effectively freeze the market — presumably for long bouts of head scratching — until, with any luck, market fundamentals recover and prices regain their health. It’s also known as kicking the can down the road.
One sheet buyer recently suggested there could be even more market highjinks this time around. He noted that one US mill has substantially cut its HRC prices for some relatively high-volume deals so it can fill up its order book. But that’s not the end of it, he believes. The increased business would extend the mill’s delivery lead times, allowing the producer to then raise prices on any new orders. That means this mill would be cutting prices in order to raise them, while possibly creating an opening for other mills to raise prices as well.
This is reminiscent of the Vietnam War commander who said he had to destroy the village in order to save it.
Thanksgiving, Christmas and the holiday vacations that come with them will be here before we know it. If domestic mills can keep prices from further collapsing for two more months, 2014 will be a jolly year indeed, especially considering that if the market maintains its health the often substantial seasonal boost of the first quarter of the New Year will arrive just in time to refresh the whole situation.
But it appears that before America’s sheet steel players can put their feet up by the fire, some intense market jujitsu may be in order.