This week, the physical steel market continued to push higher, with a $1,900 spot price appearing all but inevitable. One recent development of note is that for the first time in nearly a year, meaningful levels of spot tons for September production were offered to the market. The fact that tons became available was not a surprise, in recent weeks mills showed strict discipline not to market spot tons prematurely as they had earlier in the year, mainly because they are behind on contracts. The two aspects of this event that were unanticipated, however, were 1) the volumes were higher than we initially anticipated and 2) they were quickly soaked up by downstream customers in need. Our view is that the events of this week are a microcosm of how the steel market will operate through the end of the year and into the first quarter. We expect further upward pressure on prices due to the dynamics in the automotive sector as well as insights from continued 2022 mill contract negotiations.

Taking a step back, it appears the elevated level of spot tons are driven primarily by the continued slowdown in auto production. From the mills perspective this is an unequivocal win-win. First, it discredits a long-held, theory from bullish participants, that support for elevated prices would disappear once steel production rebounded to 2019 levels (which occurred around the May-June timeframe). Plus, they have guaranteed future demand when auto production starts back up as auto deal inventories are still very low. On top of that, these spot tons were sold at current market prices rather than on a discount, which further supports the theory that the market continues to operate at a structural deficit and demand for steel exists at a higher level that what is being supplied.

Over the past two weeks, earning’s calls for the big three auto manufacturers in the U.S. occurred with much attention placed on the chip shortage and its impact on production. While the sentiment was similar across the board, GM CFO, Paul Jacobson was the most explicit about 2022, saying: “Production will certainly be higher next year as we hope and expect that the chips will normalize.” What we believe this means in the short-term is there will likely be more scenarios where production starts and stops and tons that were initially allocated for auto will become available on the open market. On the other hand, once the chip shortage is resolved, demand from this sector could easily keep prices elevated as they restock severely depleted dealer inventory on hand.

Additionally, ongoing mill contract negotiations suggest a bullish outlook from the mills. They are the primary touch point of true steel demand within the domestic market, and if they are pushing negotiations down the road, they are clearly confident about demand and prices over the next couple of months. If they saw lower prices and demand ahead, we believe negotiations would be locked in today. In the remainder of this report, we will review the economic data released at the beginning of August.

The chart below is the Platts Midwest HRC index (orange) and the ISM Manufacturing PMI (white). Further expansion (prints above 50) in the manufacturing sector continues to support HRC prices.