Towards the end of the first quarter of this year, price increase announcements briefly stabilized domestic steel pricing as some believed a bottom was forming. We know now that was not the case, and HRC prices have fallen almost $200/st since then. Just this week, mills pushed a third round of price increases, hoping to build momentum to push HRC prices above $600 before upcoming contract negotiations. What is different now in the market that gives support to these increases that was absent in the first quarter?

During the end of 2018 and much of 2019, there was an environment of destocking that occurred across the steel supply chain. Service centers were selling material without replacing it, end users bought only what they needed for immediate use, and mills were stuck with holes in order books forcing them to chase prices lower. Inventory rightsizing, along with reduced shipments, reflected the decline in apparent demand – material ordered rather than real demand, which measures the material that is actually used. However, real demand has remained steady throughout 2019, which supports the notion that the current market dynamics, low inventories and steady demand, are supportive of the current price increase announcements. Additionally, low (and declining) interest rates make it cheaper to hold material, which would support any restocking moving forward.

In the first half of 2019, large quantities of semi-finished material was imported from Brazil, which is subject to a quota rather than a tariff. While sheet import levels began to decline in 2019, it has taken several months for the material that was imported in late 2018 to work its way through supply chains and into finished product. To account for this time lag, we view net imports (imported tons minus exported tons) in the chart below as a trailing 12-month total through the end of May.

The trailing 12 month sum didn’t reach the current low levels until the second quarter, and pricing differentials indicate that imports should decline further into the third quarter. Additionally, Brazil is nearing its annual quota based on year-to-date census and license data. Therefore, we would expect this trend to continue into the third quarter, leaving the domestic market in a steel short environment with a deficit of over 1 million annual tons compared to last year. This is certainly a different dynamic than we saw in the beginning of the year, and would support the current, and possibly future, price increases.