Strength in the domestic HRC spot market continued last week, despite signs of cracks in global ferrous markets, as the spot HRC price pushes to new historical highs. The range of spot HRC transactions is currently wide, with offers and purchases occurring anywhere from $1,060 to $1,200 depending on location, lead times and product specifications. Additionally, the buying process has changed due the tightness and price level in the spot market, creating an auction should spot tons become available. Buyers have a better chance at securing material if they submit inquiries about availability already agreeing to elevated prices, rather than requesting quotes for their desired material. This is yet another example of the market pricing strength that mills are currently enjoying. However, as the price continues to move higher, new downside risks emerge, while others grow in prevalence. This week we will address those risks while providing our outlook as to their importance and the expected timing of their influence on the market.

Last week we saw one driver of the strong headline ISM PMI was the strength in the supplier deliveries subindex, driven by tightness in manufacturing supply chains and part shortages. This is apparent in the steel market as well, with deliveries disrupted by truck, rail and barge availability. Additionally, credit markets have tightened due to a pullback by credit insurance companies and elevated prices causing limits to be hit with lower tonnage volumes. With prices doubling since last summer, credit limits will be hit with half as many tons as before. These constraints could create a headwind for the price rally, as slower steel shipments allow mills to catch up on delayed orders. However, mills are still several weeks behind on orders, meaning it will take at least a month for this to affect spot market pricing.

We are also seeing the first signs of cracks in other global commodity markets, which have been remarkably strong leading into this year. The below chart shows the percentage change of relevant commodity pricing since April 1^st, 2020.

The domestic HRC price recovery lagged that of many other markets during the summer last year, but it has recently strengthened to overtake those markets on a percentage basis. Moreover, important global ferrous markets such as iron ore, Turkish scrap and Chinese HRC have pulled back from their highs reached over the past month. Because none of these markets are directly linked to the domestic market, we do not expect this to have an immediate effect on the ongoing rally. However, further weakness in the months ahead may be a signal that global demand is slowing. The good signs for HRC bulls are lead times that are still extended near the longest levels on record and end user demand that is strengthening at elevated price levels, signaling that lower prices are unlikely for at least the next two months. Additionally, the steepness in the future curve provides a good buying opportunity, especially in the fourth quarter, where the curve seems undervalued.