Over the last week, fundamentals in the domestic ferrous market strengthened. We saw prices stabilize, with many of the spot indexes sitting at or above the $570 level. Sentiment in the market also improved with the forward curve moving higher by $15-20, raw material prices strengthening and encouraging manufacturing data releases. Below is a chart comparing the regional manufacturing reports to the national ISM PMI index.

With four of the six regional reports released for February (and market expectations for the remaining two reports), the index of regional reports shows further recovery is expected in next week’s national PMI report. This is an indicator that manufacturing demand is continuing to strengthen from the low levels in the second half of 2019. This bodes well for the ferrous pricing outlook, especially with low inventory levels across the supply chain.

So with the above constructive fundamental backdrop, why are prices not moving higher? If you have followed other financial markets over the last few days, you have seen the hysteria around the recent spread of the coronavirus outside of China. Fear of the virus spreading further and the associated demand destruction has swept headlines and pressured most risk assets. Moreover, there is an extreme amount of uncertainty surrounding the virus about diagnoses accuracy, vaccines and duration. If this panic turns into a pandemic and last for several weeks or months, we will see the effects in the domestic steel market, specifically the automotive supply chain. If automakers cannot get necessary parts from abroad, it will halt production, leaving a sizable gap in steel demand. This will leave the market oversupplied and weigh on prices, despite otherwise strong fundamentals.

Effects of the coronavirus pose a risk within the steel market, even though prices have not reacted accordingly. However, there also is upside risk should coronavirus fears subside quickly. Fortunately, the market has the ability to hedge this risk, in both directions depending on business type, through the forward curve.