Spot HRC prices rose again last week, solidifying the narrative that the near term bottom has been reached and prices are starting an upcycle. Mini mills have raised offer prices for HRC inquiries to near $480, joining integrated mills at the higher prices. Mills have pointed to extended lead times as justification for higher prices, with most September HRC order books already full. This is unsurprising as low pricing over the last few weeks caused a flurry of spot buying and contract buyers maxing out their tonnage placed at discounted prices. Interestingly, these higher offer prices were not preceded by an official price increase announcement. While it is too early to tell if there will be physical transactions at these higher levels to support further price increases, this week we will dive into how high prices are expected rise this cycle.

Market sentiment can play a large roll in commodity price cycles, and the steel market is no different. Buyers tend to pay high prices for more tons when they expect that the price will be even higher when the material arrives in the following weeks. The best gauge of market expectations is the future curve, which displays prices that market participants have agreed to transact in future months. The below chart shows the domestic HRC futures curve as of last Friday.

From the current spot price, the curve is displaying expectations for prices to increase $50/st over the next month, plus an additional $30/st through the end of the year. Looking further out on the curve, 2021 is priced near $550, representing a $100/st increase from current spot pricing. There are several current market dynamics that we can point to for justification of the expected price rally including increasing raw material prices, global industrial metal and HRC strength, the weakening US currency and the general economic recovery from the pandemic induced shutdowns.

However, the strength of the price rally will be based on inventory levels and material needs at both service centers and end users. Service centers have been destocking since the spring, but the recent low prices appear to have spurred buying interest, making restocking in the months ahead at higher prices unnecessary and unlikely. From the steel consumer’s perspective, buying at higher prices will only occur for material that is absolutely needed for near term projects and/or sales. With the current economic uncertainty, it is unlikely that they will carry large inventory levels into the end of the year. Along with this apprehension among buyers, new and idled production is set to come online near the end of the year, creating a massive headwind for a sustained price rally in the absence of incremental demand. With that being said, near term market dynamics support higher prices in the weeks and months ahead.