Over the last week, there has been an overwhelming amount of news regarding the stock market, the bond market, commodity markets and the domestic ferrous market. As we make our way through the clatter, let’s start with what we know.

Last Thursday, US Steel and Nucor led the mills in announcing a $40/ton price increase, which was expected by many in the market. The March scrap trade moved up $10-$20, giving mills support and confidence to push the increases. However, last week financial markets around the world reacted to heightened risks from the coronavirus spreading: US stock market down over 11%, iron ore down 8%, crude oil down 16%, and the 10 Year yield fell 32 bps to 1.15%. The volatility index (VIX) moved up 23 points on the week, settling above 40.

Increased volatility in financial markets is a signal of the uncertainty surrounding asset prices, economic outlook, and the coronavirus impact. There are many unanswered questions including: What impact will the coronavirus have on the economy, demand and GDP? Is this the bottom in the stock market? Can commodity prices fall further? Regarding the steel market and last week’s price increases, many are wondering if there is support in the market or if the increases were pushed only to prevent spot prices from continuing to slide.

During 2019, the mills attempted multiple times to stop the price decline by pushing increases despite falling scrap prices and weak order books. However, scrap prices have moved higher in March, and lead times remain extended, signaling that order books are strong while some mills remove production for maintenance this spring, supporting higher spot prices in the near-term.

Looking further out into 2020, downside risks appear more prominent, and one of them is increasing import levels due to expanding price differentials. We focus on is the differential between domestic prices and the China export price, as it is the main driver of the world HRC price. The graph below shows the difference between the Midwest HRC price and the China export price, including transportation costs.

This differential has slowly grinded higher since October as the domestic price rallied further than the China export price in the fourth quarter and into January. However, recently the differential moved higher even as domestic spot prices slid, signaling that there was more weakness in the Chinese steel market than the US market. The weakness abroad can be attributable to the coronavirus that hit China first during their New Year holiday at the end of January and is still rippling through their market. Chinese HRC and rebar inventories (below) are skyrocketing as domestic demand and transportation have fallen while furnaces have continued to produce steel, depleting raw material stockpiles. Expect weakness in the finished steel export market ahead as Chinese mills offer their inventory in the global market.

Due to longer lead times associated with the global steel trade, the low priced material would not surface in the domestic market for several months. Even though current import levels are low, there is the possibility that they could rise substantially this summer, weighing on future prices. Considering this along with the demand related risks associated with the coronavirus, which are also pushed into the future for the domestic steel market, the backwardated forward curve makes sense with spot prices rising and future prices at lower levels. This allows those skeptical of the price increases and demand environment to lock in lower prices in the future rather than paying current high spot prices.