The steel market over the last several weeks, just like many of our lives in quarantine, has been extremely boring. Every week seems to be the same story – spot indexes drifting lower, forward curve trading in the same $20/st range, mills idling plants and reducing production, and uncertainty surrounding an economic restart and demand outlook. While this routine may encourage the expectation that there is no end in sight, it is important to stay vigilant as many indicators are pointing to abrupt changes in the market, which could occur in the very near future. We will discuss the most important signals below.

Frequent readers of this report have seen the below graph multiple times, showing the differential between the TSI Platts Midwest HRC Index and the Platts China export price.

The red line represents the differential level where the delivered price on material from China would theoretically be the same as the domestic price. While imports from China into the domestic market are non-existent, the export price tends to drive the world price making it a useful proxy for the general world price. The blue differential line is nearing historical low levels that tend to coincide with a bottom in domestic price. This is a signal that importing material is currently unattractive, in line with the low levels of imports we have seen recently. Moreover, supply chain disruptions are likely to add additional cost to importing, further discouraging foreign buys. This is bullish for spot prices over the next several months.

With limited foreign supply, many will turn to domestic mills to fill their current spot needs. However, we have seen swift and substantial production cuts at domestic producers, due to their expectations for declining spot pricing. With indexes reflecting spot activity below $450/st for HRC, discounted contract pricing is below the cost to produce the material. This is because raw material prices, namely scrap, has been resilient due to the constrained market where very little scrap is created. May busheling futures are trading near $300, indicating a metal spread to spot HRC below $150. Low or negative profits are unsustainable and will force further production cuts, paring an already limited domestic supply. This is also bullish for spot prices.

Looking at the market’s expectations on the forward curve, May future is trading near $470/st. This would suggest that spot transaction price will increase over the next month. This steep contago in the curve continues out into 2021, where the futures are priced nearly $100 higher than the current spot price. Our advice at FGM to a buyer right now would echo the message of the curve – Buy spot tons now, because they will be priced higher in the future. If we haven’t already hit the near-term bottom, we will reach it soon.