With prices peaking and signaling a roll over in the physical market, there are two questions that must remain top of mind to take full advantage of lower prices without being complacent:

1. What will be different about this downside move compared to last?
2. Where is the floor going to be set?

For the first question, we turn to the graph below, which shows the spread between the TSI Platts Midwest HDG price and the TSI Platts Midwest HRC price going back to 2014. The dashed green line represents the historical average before and after the peak of the most recent rally, $233, and $474, respectively.

What is most interesting about this chart is the fact that while prices were constantly reaching new record highs in the spot market, the spread between HDG and HRC did not set a record until the end of June, when HRC was $1,750. A few months later, once steel prices were falling, we entered a period where HRC prices fell far more severely than HDG or CRC and that spread expanded to historic levels. From the previous peak in September to today, the real cost to convert HRC into a tandem product has not meaningfully increased. Therefore, we interpret the historically elevated spread over the last 7 months as an indication of stable demand in value-added products, throughout the downside move. The major difference between then and now is that inventories from steel consumers are lower than they were in the beginning of this year when the spread was its widest. Today, buyers appear to be on the sidelines as spot prices drift lower, however, the market should be cautious of assuming prices will continue to fall for a prolonged period when there does not appear to be enough material on hand for a full-on buyer’s strike.

Moving on to the second question, the dramatic pace of the 50% rebound from March to April was driven by input cost concerns, and those have not been entirely resolved. The chart below is an updated look since it was published in the March 18^th report, with the front month Busheling Future (white), Pig Iron delivered to New Orleans (blue), and Midwest shredded scrap (green).

Prices have softened since the last time we looked at this chart, however, each of them remains above pre-invasion levels which effectively raises the floor for HRC prices. Even if they continue to decline, there have been significant supply disruption/logistics issues linked to moving these raw materials from where they are to where they need to be. The current HRC curve is pricing in a rapid normalization of raw materials which has yet to materialize. Significant upside risks to that scenario are both further disruption in these markets and global demand continuing to increase for raw materials as China implements broad changes to the environmental impact of its steel industry. Backwardation in the curve presents an opportunity to hedge that risk by fixing your steel price for future tons at a sharp discount to current spot levels.