When economists analyze economic data, they categorize incoming data into two buckets based on what economic aspect the data is portraying – “hard” and “soft” data. “Hard” data is released by governmental and statistical agencies describing concreate economic activity, while “soft” data is a gauge of confidence and sentiment in the economy. To understand a full picture of an economy, both types of data must be considered. We can use the same structure to understand the dynamics of the domestic steel market.

Overall steel market sentiment has been weak over the last month. Pricing outlook, expressed by many steel buyers, indicates expectations of lower spot prices over the next few months. This is driven by their reluctance to purchase material until it is absolutely needed. Inventory levels of end users continue to decline, and uncertainty surrounding the US/China trade war is delaying large capital spending plans. This has been the prevailing buyer sentiment over the last year. It is also apparent in the futures market, which gauges expectations of future spot pricing. The November HRC future has declined over $70/st since the end of July.

However, the hard data, i.e. data pertaining to supply and demand, paints a much different picture. Imports remain at low levels and current price differentials will discourage further imports this year. While future prices have declined recently, lead times remain strong, indicating mills have filled their order books. BOF and EAF profitability has remained steady over the last few weeks as raw material prices have declined simultaneously. The below chart shows HRC prices relative to scrap pricing, which explains why mills were able to negotiate lower prices while maintaining profitable sales.

Considering both these “hard” and “soft” dynamics in the steel market, the upside and downside risks appear balanced, which is consistent with the current, flat futures curve. However, the flat curve is an appealing opportunity to lock in prices out into 2020 at levels well below the historical average HRC price of $625.