After 8 weeks of declines, spot HRC prices moved sideways last week with repeatable physical transactions bottoming near $440/st. Generally, and across both EAFs and BOFs, mills have lifted offer prices reflecting their desire to prevent prices from declining further. However, with spot indexes still in the mid to low $400s, buyers would much rather take their maximum amount of contract tons at discounted prices rather than paying the new, higher spot offers. Therefore, in order for prices to move higher from the current level, steel consumers will have to consume more than their contracted material, forcing them to the spot market to complete their needed purchases. To try to gauge this demand returning to the steel market, we will dive into last week’s release of the July ISM Manufacturing PMI report.

The below chart shows the relationship between the Platts Midwest HRC index and the ISM Manufacturing PMI over the past 9 years.

Historically, the Midwest HRC price trends in the same direction as the manufacturing PMI, especially over long timeframes. Since the PMI bottomed in the spring due to the coronavirus pandemic, the two have diverged with the PMI recovering and spot HRC prices remaining depressed. A rally in the HRC prices seems to be the logical resolution, but two subtle components of the PMI index may lead to another conclusion. First, the index is constructed through surveying manufacturing purchasing managers on specific components of their business compared to the previous month. A growing or expanding index (above 50) reflects month over month growth, rather than high levels of consumption and demand. Due to the low levels of economic activity during the economic shutdowns over the past few months, month over month expansion does not signal that the manufacturing sector is back to “normal”. Second, the index gauges sentiment of manufacturers in 18 sub-sectors, where Metal Products are only one component. Other large sub-sectors are Computer and Electronic Products, Food, Beverage and Tobacco Products, Chemical Products and Transportation Equipment. These sectors have performed much better throughout the shutdown and recovery as the post-pandemic economy looks very different from before. Here is a quote from one the July report respondents from the Fabricated Metal Products sub-sector:

“While demand in [the] coming six months is stabilizing, it is at a significant reduction and clear [that] customers have little confidence in the forecasts.”

This commentary does not necessarily match the optimism in the headline index, leading us to be more cautious in our price outlook. With that said, upside risks continued to build this week as the expectation is for August to be the near term bottom in scrap pricing. Should lead times push out from here, it will confirm that mills order books are strong enough to support higher prices and allow the ferrous metals industry to join the manufacturing recovery.