Discussions in the domestic steel market recently have revolved around the recent mill price increases, and whether they have support in the market. Unsurprisingly, mills have stated in their earnings calls over the last few weeks that they see market support and have captured the majority of the increases. This belief, along with apparently higher scrap prices in August and beyond, may encourage the mills to push an additional price increase. While mill profitability on the marginal ton produced has recovered, it remains at low levels and mills are still looking to boost it with additional increases. However, this is only a one sided, skewed view of the steel market, and to better understand the demand side, we look at steel purchasers’ activity.

We have found mills are less willing to negotiate on price recently and there has been a wide range of transacted prices. However, activity has been extremely limited as most buyers are uncertain exactly what is the spot price. Moreover, several end users have expressed doubt that the increases will stick and are reluctant to make purchases. While this appears to paint a gloomy picture for demand within the market, there are secondary consequences that lead to an alternative conclusion. Purchasers only buying what is absolutely needed will lead to lean inventories across the supply chain. If this happens across the end user base, any extension of lead times will result in a flurry of buying activity in order to maintain operations. Restocking becomes attractive, and sometimes necessary, while lead times extend and prices increase.

Historically, the futures curve has been a poor predictor of price. Nevertheless, it does accurately reflect current expectations of the future spot price. The curve remains in contango, with the spot price well below the prices expected in the next few months. Looking into the fourth quarter and next year, the market is expecting the Midwest HRC price to move above $620. This would mean that mills successfully achieved and captured their increases, and they may have ammo to push for more.