The New Year’s hangovers have all worn off by now and US sheet market players are all back at their desks, but questions remain about what should be expected in 2017.
The age-old response — “If I knew, I’d certainly be making more money than I am right now” — has echoed through phones and inboxes.
It is a nearly impossible question to answer and the logical narrative of how events could unfold can get derailed in the blink of an eye. The “polar vortex” of 2014 or the oil price decline in 2015 were largely unpredictable and had prolonged effects on steel prices, supply and demand.
One possibility is that 2017 could follow the 2016 cycle but with an important distinction: everything is two quarters in advance. Last year’s hot-rolled coil spot prices were at their highest sustained level at mid-year, starting at about $570/st in early May and ending July at about $620/st.
A similar climb started in early December when spot HRC was also at around $570/st and moving forward to a mid-January price of around $630/st. There is no sign of the latest price turning down, but market players are also saying HRC may be nearing a peak of about $640/st.
To recap: While price hike announcements were anticipated by the market in last year’s fourth quarter, US Steel was able to catch the market slightly off guard with the timing of the first round, which set the recent price run-up in motion. The steelmaker announced in late October it would be raising sheet prices by $30/st, which was then supported by competitors and higher scrap prices during the November buy week — a trend that has continued.
The surprising USS move ultimately served to get buyers off the sidelines and prices began a sharp ascent. By late October, US HRC spot prices, ex-works, had bottomed at $475/st. Prices are now up about 33% from that October low.
Mid-January HRC prices are just $5/st under last year’s peak price seen in June. Currently domestic sheet mills are pushing for $640/st for February HRC production but beyond that, price momentum may be easing.
One reason is that the US market does not operate in a vacuum — even though it sometimes seems that way. Despite US mills wiping out many traditional foreign sheet supply options via unfair trade cases, global price fluctuations in input costs and finished steel will continue to have ripple effects in the US in 2017. Last year was no exception, with the unanticipated run-up of met coal prices and increases in global finished steel prices.
Metallurgical coal prices ballooned in 2016, rising from below $80/mt FOB Australia at the start of the year to a peak of $310/mt for premium low-volatile material. A combination of factors pushed prices upwards: namely, tighter seaborne supply as major miners had to declare force majeure, and China cutting the number of working days for coal miners.
Since November the market has cooled dramatically with Australian and Chinese supply beginning to normalize. On January 19, Platts assessed premium low-vol met coal at $175/mt FOB, down a whopping $135/mt from the peak, aiding margins for Chinese mills that had been squeezed by the huge cost increase.
Raw material prices may continue to deflate in 2017. Alexey Mordashov, majority owner of Severstal, told Russia 24 TV during the World Economic Forum in Davos last week that steelmaking raw material prices could decrease by 10-15% this year, or a little more.
“Due to that, steel consumption has started to grow again but China is slowing down production, closing capacities, the raw material price rally is to cease and prices may start to decline, although it is unlikely they will drop to the levels of early 2016,” said Mordashov.
Global price volatility isn’t the only variable that renders the US sheet market unpredictable in 2017. There’s also domestic demand and the country’s political environment. Demand has been relatively stagnate since the oil price decline and steel consumption in the energy market weakened significantly last year. However, there is talk from both mills and service centers that energy may be showing some signs of renewed life in 2017.
The pick-up can be seen in the Baker Hughes North American rig count. In the US, oil and gas rigs bottomed out towards the end of May 2016 at just 404. Since then, US rigs have rebounded to 659 as of January 13, up 63%. While any sign of improvement is a welcomed sight for the US steel industry, it is important to note that the US rig count averaged 1,862 in 2014 before the oil price decline. There is still a long way to go.
In addition, US demand may get a boost under President Donald Trump, through infrastructure spending, the “Great Wall” and his focus on domestic oil and gas drilling. Since the election, expecting the unexpected has become the new normal for indications of how Trump’s policy will be shaped, but these were three of his campaign focal points. Even without these Trump policies implemented, most discussions on the topic throughout the steel supply chain have indicated a sense of optimism regarding the outlook of the manufacturing sector under Trump.
It looks to be another interesting year for the US sheet industry — but that should be expected.