Last week, we looked at some of the fundamentals behind the Chinese steel market, this week we will turn back to the U.S. domestic market as we finish the month of July and look forward to the new data released in August. The chart below shows the global price differentials including transportation and applicable tariffs, going back to 2014.

Historically when global prices are at parity with domestic prices, it sets a floor for the U.S. domestic price by signaling that imports have been priced out of the market in the short-term. This spread has been converging rapidly since the beginning of May, with the U.S. price outpacing most global prices lower. Over the last two weeks, the first global differentials turned negative (Europe & Turkey), and today the remaining countries have approximately $70 remaining in their differential spread.

An additional signal we are always watching when the market is approaching a bottom is how much domestic mills have responded to the falling prices. The chart below shows capacity utilization in the U.S. which moved to its lowest level since April of 2021.

When looking at the two in concert, we can start to think about what the rebound will look like. While there are additional factors to consider, these two charts provide a good read on how supply is being rebalanced with demand. It is costly and time consuming for BOFs to pull production out of the market, but EAFs can adjust production levels up and down much more easily, potentially limiting the upside. If this is the bottom, it will be important to watch how quickly EAFs increase production as prices rise, since they were the first to throttle down. That question will be answered down the road, but the key takeaway for today is that the foundation for the next rally is already starting to be built, and as prices continue to fall, the benefit of waiting for a better deal is being diminished every day. As we will see below, the forward curve has already started to react, with January 2023 trading $70 higher than August.