With steel spot prices plateauing over the last three weeks, and the forward curve selling off hard, now is a good time to take a step back and make sense of what has happened in the domestic steel market and what risks are on the horizon. To best illustrate this with proper context, we will look at the futures curves below from February 11^th (orange), March 11^th (green), and last Friday (white).

Before and after the Russian invasion the forward curve in both instances were flat, shifting from ~$900 per ton, up to $1,600 per ton in a matter of weeks. The curve in March marks a period of significant uncertainty and a move away from the fundamentals. Turning to now, the initial fear of prolonged raw material and finished product shortages has become less likely, which lead to the sell-off in the back of the futures curve. As we frequently mentioned during the 2020-2021 rally, it is important to remember that the forward curve is not a predictor of price. While the downside risks in the market have become more significant at the current elevated levels, a backwardated forward curve indicates premium value for material today compared to material in the future. So, now that the market has settled, it is time to start looking at the fundamentals, again. This week, we will look at the import market, where the chart below shows sheet imports starting in 2017.

After a recent low level of sheet imports arrived in February, they appear to have rebounded with March and April projected at 1.2M, and 980k short tons, respectively. Intuitively, steady arrivals at these levels will keep domestic prices in check. However, expectations around lower prices because of increased imports need to be remain line with what the data is telling us. The chart below shows the relationship between the Midwest and Houston HRC prices, where the Houston price is used as a delivered import price.

While the historical dataset for Houston prices is limited compared to Midwest HRC prices, and it does not update on a weekly basis, it has set a reliable floor over the last couple of years, and last week, the Houston price increased to $1,400. Compared to this time last year when the Midwest price was at a similar level to what it is today, there have been higher sustained levels of imports and domestic production over the last 6 months. In our view, this is a clear indication of strong demand within the steel consuming sectors of the U.S. domestic market. If you are waiting for prices to fall to place orders for material you need in the next couple of months, you are taking on an outsized upside risk. Rather than waiting to buy lower spot prices which may never come, the sell-off in the forward market is already offering a sharp discount to current prices that are available in the physical market. It is time to start revisiting the playbook from the 2020-2021 rally that proved to be successful for so many of our customers.