The spot price for HRC continues to increase with limited transactions occurring at elevated levels, while mills remain disciplined on maintaining 9-week lead times and not overbooking contracts further out. Much like in recent weeks, any spot material that surfaces is sold quickly and at new record levels. We are currently in the middle of an 8-month rally, and the most troubling part for anyone who is short steel, physically or financially, is that it remains entirely unclear when mills will be caught up. More recently, multiple mills have started forecasting that they will be reinstating contract minimums, to make their backlogs more manageable. Additionally, imports are coming at elevated levels, but these levels below expectations and are insufficient to meaningfully impact the structural shortage. In this week’s report we will dig deeper into why we are starting to believe dynamics in the steel market are not going back to the way they were in the past.

As this rally continued to reach new highs, the murmurs of a bubble in the steel market grew into a clamoring. While no one could have predicted the magnitude of the run up in price, individuals who have remained locked into their perspective of prior rallies are continually hurt by the ever-changing landscape. At FGM, we cannot tell you with any serious level of certainty where or when steel prices will peak, no one can, but we have always been proponents of closely following demand in relation to supply. With that in mind, we have come to believe that a fundamental shift is taking place that will change the domestic market going forward.

Our outlook is colored by three main factors; they each have short-term consequences, but the long-lasting effects could be more severe. The first factor is looming demand in the domestic market. Two main steel intensive subsectors appear prime to drive demand through the end of the year – auto and energy. One of the biggest surprises of last year was how quickly the auto sector bounced back, and while the chip shortage is placing a ceiling on current production, this will likely push demand out further than seasonal norms. Additionally, a strengthening labor market will support auto demand. As far as energy, crude oil and gasoline prices have lagged other commodities over the past year. New demand from the energy sector, that has been largely on the sidelines, poses a massive risk to already short physical steel supply, and thus prices.

The two remaining factors are global, specifically the European and Chinese markets. While Europe has been in the news lately for the poor rollout of vaccines, the signs that the region is recovering are starting to be more pronounced. Anecdotes of European importers buying everything on the global markets are commonplace, and as the region turns the corner economically, their demand for steel will be a significant roadblock for any supply relief in the U.S. domestic market. Finally, the long-awaited announcement – the Chinese government reduced export rebates, while also removing import tariffs, expressing their commitment to reduce steel production to curb emissions. Globally, this means diminishing already low supply. It is clear that the old rules no longer apply and it is time to start looking into the future to see where the forward curve can offer relief and stability to your prices when you already know you need to be purchasing steel.