Last week was another strong week in the U.S. domestic steel market, as spot prices continue to climb. With the end of August quickly approaching, we have now seen 13 straight months of higher prices starting with a TSI Platts Midwest HRC monthly average of $459 in July 2020 and a current August average of $1,897 (as of the 27th). As we look forward through the rest 2021, many of the forces driving the rally remain intact. Seasonal demand is broad and strong and inventory levels are below normal operating levels, while consistent spot ton availability continues to be unreliable. On the other hand, downside risks continue to mount as steel prices push into rarified air. We continue to hold a bullish outlook on the market and believe the structural shortage will be the overriding factor driving steel prices in the U.S.; however, in the remainder of this report, we will address mounting risks we see on the horizon.

The chart below shows import arrivals starting in 2016 in white, with their 3-month (green) and 12-month (red) averages.

Since the beginning of the rally, sparce levels of imports have steady increased and now sheet imports have surpassed 1 million short tons in July, with August expected to match those levels with an ever-expanding global price differential as a backdrop. Further, anecdotal evidence suggests import levels should remain elevated well into 1Q22 as a lack of commitment from the mills on contracts has pushed buyers to look abroad. Additionally, mill profitability is at astronomical levels with raw materials stalling out and plateauing below 2008 price levels. We also anticipate the upcoming mill outages will put further downward pressure on scrap prices going into 4Q21. Finally, steel buyer frustration has intensified over the last six months, as downward pressure from these factors grew, while the price continued to rise, which has caused an aversion towards buying any speculative material, today. The combination of these dynamics appears to be slowing momentum and causing a consolidation of HRC prices below the $2,000 level, which seemed inevitable only a few weeks ago. However, slowing momentum and increasing downside risks don’t necessarily lead to lower pricing in the short term. In the coming weeks, a large amount of production is coming offline due to planned mill outages, while recent pockets of spot material have all but dried up. Buyers, that did not take advantage of Q3 import offers from earlier this summer or purchase any tons from the recent round of spot availability (while under the impression the market was turning around), who need material right now have nowhere to turn. This will likely keep prices elevated throughout the end of the year.