While the rate of price increases in the HRC market has slowed over the past few weeks, strength in the spot market persists, and the recent winter weather across the country is likely to support higher prices for longer. Weather related delays and power availability caused several mills across the southern United States to slow or halt production, further compounding the operational and transportation difficulties that the steel market had already been experiencing for months. This disruption, in one of the tightest steel markets in at least a decade, will put mills further behind in their order books and extend this record rally. This week, we will dive into the energy market, where the winter storms had a significant impact on supply, demand and of course, prices.

Freezing temperatures across the Southern U.S. wreaked havoc on the energy and transportation infrastructure needed to produce oil and gas, causing increased demand for power and heat that was not available. Wells, pipelines and storage facilities became inoperable, compounding the effects of the undersupplied energy market. While the crisis from this weather is hopefully a short-term, temporary incident, this is not dissimilar from the broad factors driving the steel market recently – elevated demand at a time when supply and production are limited. We have also seen the same dynamics, and commented on them in this report, across multiple other industries and commodity products. The below chart shows the Platts TSI Midwest HRC price in white and the front month rolling WTI Crude Oil future in orange.

Over the past 4 years, the two prices have reacted similarly, but have not shown a perfect correlation as energy is only one segment of domestic steel demand. Moreover, since oil prices adjusted lower at the end of 2014, the steel demand from the energy industry has represented a smaller percentage of overall demand. However, as oil prices continue to increase, it is likely that steel demand from the energy industry will grow. This relationship, fluctuating steel demand from the energy industry as oil prices change, can be seen in the chart we include on a weekly basis showing crude oil prices and rig counts. While recent gains in HRC price have significantly outpaced increases in oil prices, continued gains in energy prices will cushion any decline in the robust steel demand driven by changes in consumer spending from the pandemic. Additionally, the effects of this weather not only affect oil production, but also steelmaking and transportation. If the steel price was thought to be nearing a tipping point before these storms, this most certainly pushes out the timeline of an eventual price peak, allowing for even higher prices ahead.