This week has been very quiet in the physical steel market with transaction prices creeping lower, albeit on very limited activity. Mills have maintained higher offer prices in quotes, but they appear willing to negotiate when buyers have an actual order to place. However, there are very few spot orders being placed and a wide range of transaction prices, creating uncertainty over the actual spot market price. Additionally, discussions about contracts for next year have begun, but very few final agreements have actually been made. Until these contract agreements are finalized, pricing expectations will be very much up in the air.

Uncertainty is also prevalent across economic data and news. Global and domestic manufacturing PMIs have been weak in recent months, and confidence in the economy among business leaders has declined. There has been very little discernable progress in trade talks with China, with the structure and contents of a deal still unclear.

With all of this uncertainty radiating in the steel buyer’s environment, purchasing decisions are delayed until material is absolutely needed. With lead times shrinking and prices drifting lower, they are being rewarded for postponing these decisions. Additionally, organizations throughout the steel supply chain are focusing on slimming their inventory levels after declining prices over the last 14 months have shocked their company’s financial performance. Service center and end user inventory levels have been at historic lows for an extended period. The recent price rally failed to spur any significant restocking.

This uncertainty in the steel market is exhibited in the elevated volatility of multiple different Midwest HRC price indices as well as the futures curve. When volatility is present within a business’s operations, it becomes more difficult to maintain steady earnings, create budgets and plan for future capital expenditures. We recommend using options to protect against this rising volatility in pricing.