Last week, the physical market showed further price weakness. Deals continue to happen well below published spot prices with few caveats, where some products remain “off the table”, depending on the mill. The main takeaway here is that for now, mills appear to be filling holes at a discount, rather than actively competing for market share. With that being said, buyers have no incentive to pay published index prices on spot material and may be receiving high priced material on lagging contracts. The tension in that dynamic could lead to a rapid price correction. Additionally, while steel intensive industries continue to hold significant, and in some cases record, backlogs of existing orders, the seasonal slowdown in steel demand reduces the urgency to restock. While a fundamental bottom to support prices has not yet formed, these drivers (lead times, capacity utilization, import price differentials, mill profitability, etc.) have all begun moving off their historically high levels. The chart below shows the monthly average of mill lead times in white, and mill capacity utilization in orange.

In last week’s report we noted the slowdown in production, shown by capacity utilization rate declining, which began mid-October and continued last week. One important factor to keep in mind when comparing now to 2018 & 2019 is that the Trump administration had the expressed goal of keeping capacity utilization above 80% to ensure availability for buyers after the 232 tariffs were enacted. A result, mills maintained elevated production levels, and added capacity, to politically justify the tariffs while imports plummeted. Due to recent consolidation, we anticipate more operating flexibility, where mills can react to falling prices by reducing production. Mill lead times continue to be the best insight into order books and a leading indicator for prices. The main difference now, is lead times may not go as low, or stay low for as long, before mills adjust production. As steel prices fall, the most significant upside risk to is waiting too long for lower prices and running out of the material needed to support your existing and new orders.