Over the past two weeks, HRC spot price indexes continued to drift lower, falling about $10/st each week, to $475. Lead times remain depressed, and looking into July, the market consensus is for prices to continue to drift lower. The scrap market, which tends to be a leading indicator for the direction of finished product pricing, is expected to fall significantly from its June high. While the initial expectation was for #1 busheling to fall $20-$30, the mills’ scrap buys this week are pointing to a larger decline. Currently, EAF profitability on the marginal ton produced is tight, and in the face of declining HRC prices, significantly lower scrap prices are needed to make additional production viable.

Despite this gloomy ferrous pricing outlook, recently there have been several positive economic indicators. Many are discussed in detail throughout this week’s report, but here is a summary of the headlines: Strong June auto sales, 4.8 million jobs added in June, positive revisions to historical construction spending, increasing global PMIs and the US ISM Manufacturing PMI moving up into expansion in June. Regarding PMI readings, the index is a measure of current sentiment and future expectations compared to the previous month, so significant growth in these readings was expected as the economy opened up in June. Historically, spot HRC prices track closely to the ISM Manufacturing PMI, so the recent increase is encouraging for the immediate price outlook. The below chart shows this relationship back to 2010.

With all of these positive developments coming out of the economy, how is it that spot HRC prices have drifted lower and are expected to decline further? At the end of the day, the price is determined by market specific supply and demand. Demand in the steel sector, as well as the economy at large, remains below pre-crisis levels. Many businesses have scrapped or delayed capital expenditures for long-term projects due to the continued uncertainty. As long as health threats from the coronavirus persist, the economic recovery will be at risk. Automotive factories have restarted in a limited capacity, but their steel demand has lagged as supply chains were forced to hold high inventory levels during the shutdown. While oil prices have recovered significantly from their spring lows, they are still only hovering near $40, which has yet to spur a recovery in rig counts or steel intensive projects. On top of this depressed demand picture, mills are planning to add supply to the market over the next several months. US Steel is planning to restart their Gary #6 blast furnace in early July, and there are rumors that several more restarts are likely later in the month. If the current demand levels persist, this will lead to an oversupplied market and drive the price even lower.

While we believe there is further downside risk to the price, and that the forward curve is overvalued, we continue to monitor indicators for prices to reverse. Specifically, we are closely watching mill lead times, service center inventory levels, and future scrap prices. Generally, prices rise much faster than they fall, and there should be good opportunities for steel buyers to lock in spot material or futures at historically low prices.