Last week in the physical market, the grind higher in HRC spot pricing continued as participants held their breathe, waiting to see what would come out of the SMU conference in Atlanta. Taking a step back, current tension in the physical market is the result of two misaligned timelines. On one hand, uncertainty and supply chain woes coming from the auto and energy sector have caused more short-term spot ton availability than anyone anticipated for September production. It is also important to recognize, the market has largely absorbed those tons at record high prices, as a sign that pent-up demand remains well in-tact. On the other hand, there are an unprecedented number of planned outages occurring this year, starting in September. We anticipate these dynamics will cause upward price pressure as continued logistical and shipping disruptions will have a heightened impact based on regional supply/demand imbalances.The Mill Fill Index (below) represents tonnage per month that domestic mills must fill based on changes in inventory, shipments, and imports at service centers.

This month, the index shifted lower in July to 1.15 million tons, which is the lowest level since the beginning of our current rally and just below the 5-year average. The main driver of this month’s move came from a larger decrease in shipments, as opposed to a slight increase in inventories, which remain 24% below their 10-year historical average. Current commentary around service center inventory levels is that most are comfortable carrying lower inventories until prices subside, however, this could lead to additional upside price risk if shipments remain elevated while the mills go through their planned outages. Next week has been circled for months by service centers, OEMs, and mills, as contracts were largely placed on hold until after the SMU conference, which concludes on Wednesday, August 25th. Leading up to this point in negotiations, there has been discipline from both sides as end-users are reluctant to do any speculative restocking at these prices, and with the 2018-19 price decline fresh in everyone’s mind. With that said, there has been significant consolidation among mills and the pandemic wreaked havoc on established supply chains. With all of this in mind, we believe there will be a premium for reliable availability in all 2022 contracts and the best opportunity for next year remains in the futures curve, where there is a 30% discount to current spot prices.