In last week’s report, we referenced how many of the fundamental drivers of the U.S. domestic steel price had already begun reverting to more normal levels, namely the dynamics between lead times and mill production. In this week’s report, we will dig into another one of those drivers, imports. In the chart below we show the share of monthly flat rolled steel purchases, broken down by the percentage of imports (blue) and domestic mills (orange). The dashed line represents the 3-month moving average.

The current 3-month moving average is at the highest level of import purchases, on record, going to back to 2014. This clearly illustrates how bargaining power has shifted away from the mills and towards the buyers, since January 2021. While import price differentials were historically stretched for much of the year, the fact imports were less than 50% of purchases before July 2021 meant mills had more bargaining power. Buyers could not rely on imports to fill their material needs during the early stages of the demand driven shortage. The chart below further illustrates this point, with the Midwest HRC price (navy) and the Houston HRC price (orange).

The Houston HRC price will always be more impacted by lower priced imports because that is where many of them will arrive. Here we see that as soon as imports became more than 50% of purchases and inventories began to increase, the price reacted. While supply chain issues and regional shortages initially kept the Midwest price elevated, the continued wave of arrivals and slowdown in demand caused by seasonality and the extended chip shortage, has led to falling prices. Over the coming months, as imports are expected to increase, we will closely watch the Houston price for a signal of where the Midwest price is headed. However, there is plenty of anecdotal evidence that mills are starting to price at “import busting” levels to regain some of their lost bargaining power by 2Q22.