After being frozen in place since early September, last week, the physical market started to thaw, and it’s become clear that lower HRC spot prices are ahead. This shift in momentum is the result of 5 straight weeks of incremental declines in lead times, and an overall relaxing of high offers on new orders from the mills. Most importantly, historic discount mills, are no longer attempting to sell their limited availability at the same prices as the Big 4. The looming question is – what will this mean for pricing and availability over the remainder of the year? The easy and most likely answer is additional downward pressure on spot prices and increased availability from mills. It is also important to remember that mills are actively reducing longstanding contract tons, so lead times coming in is partially a result of that effort. Additionally, while lead times are moving closer to their historical average, they remain elevated, and mills are currently offering late November/early December production. As this downcycle begins we will turn to another commodity market, which had its price peak early this year, for insight into what we could see for steel prices going forward.

The chart below shows the rolling 2^nd month Copper future (orange) and the rolling 2^nd month HRC future (white).

From its peak in early May to its recent low in August, and beyond, the clear downtrend in the Copper future price is illustrative of what we anticipate over the coming months for steel prices. As mentioned before, lower prices are expected ahead, however, there are upside risks both existing and emerging. Being lulled into a business as usual, buyer’s strike mentality could be a costly mistake. As shipping/logistics issues and limited transactions will likely cause brief spikes as the price slowly grinds lower. Additionally, extended backlogs of existing orders on top of expanding new orders show that demand for steel related goods will cause buyers to reenter the market and different times.

While the U.S. appears to be insulated from the upcoming energy crisis that has already started to impact Europe and parts of Asia, the fallout will inevitably end up on our shores. In the same way that the structural shortage of steel in the U.S. superseded everything else over the last 13 months, we anticipate varied and far-reaching effects caused by this and increased pressure on global logistics. It is impossible to know when the result will be demand destruction or supply shortages for steel. It is also unclear how the increased demand for global freight will impact imports currently on the water, and tons that are expected to arrive in 1Q22. Furthermore, we implore you not to rely on prior experiences with domestic mills during historic downcycles in price. Industry consolidation has reduced competition and fundamentally changed the landscape. While the true efficacy of mill production cuts in the spring of 2020 is unknown, there is no doubt that stopping the flow of steel was a significant factor leading to the record rally and subsequent record profits they are now enjoying. No one knows when they will choose to pull that lever again, but it has clearly been proven as a powerful tool to combat falling prices.