For the seventh straight week, spot HRC prices declined to a new low for the year and to the lowest levels since early 2016. Spot transactions, while still scarce, are occurring slightly below $450/st, but may have found a short-term bottom as mills have pulled back from negotiating below that level. Near the end of last week, there were rumors of a possible price increase from Nucor, signaling the mini mills also saw justification in their order books for higher prices. This rumor never materialized into an announcement, leaving questions about the strength of the market and the likelihood that this bottom will hold. This week, we will discuss the factors that are contributing to the upward price pressure, and whether they are enough to put in a bottom and drive spot prices higher.

The below dynamics, which also appear in our upside price risks listed below, have all grown in influence over the past two months:

• Global HRC strength – Last week, we discussed the strength in China’s steel market, driven by increased stimulus. Interestingly, China was a net importer of steel in June, the first time since 20011. However, the strength is not isolated to China –differentials between domestic and global prices are shrinking, adding to the upward pressure on the domestic market.
• Low domestic production levels – estimates show capacity utilization remains below 60% for the entire steel market, and several blast furnaces remain idled due to market conditions. Assuming it continues, this limit to supply will drive prices higher as demand continues to recover.
• Weakening US dollar – as the US currency declines in value, domestically produced goods become more attractive to foreign buyers, which is a boon to the manufacturing sector. Additionally, commodities priced in US dollars increase in price – it takes more dollars to buy the same commodity when the currency’s value declines. This is positive for demand as well as raw material costs, both of which support steel prices.
• Low imports – import levels have been declining due to the Section 232 tariffs enacted in 2018. The trailing twelve-month sum of sheet imports has fallen by over 1.2 million short tons since the end of 2018, increasing the pricing power at domestic mills.
• Iron ore price strength – Iron ore prices have been elevated over the past few months as the coronavirus has disrupted global supply chains and mining operations in Brazil. Additionally, demand for ore from China has supported the price rally.

While no individual factor above will stop the current decline, together they begin to build the case for the bottom being near. However, the spot price has steadily declined even while these upside risk existed over the past month. These factors may support the recent price increases and higher offers from mills, but mills are likely just posturing as they focus on index prints during the second week of the month, which sets the price for the majority of their contract sales. The price for these contracts will likely be slightly below the levels of July, but this expected price has fallen over the past few weeks, leading us to believe that buyers have likely placed August contract tonnage amounts closer to their minimum required for the month. Therefore, it is doubtful that there will be significant restocking to shore up weak order books. Additionally, the scrap outlook for August is showing another decline, which will also weigh on finished product prices. Until we see the scrap market turn around and lead times push out, it is unlikely that we will see a long-term price bottom form.

With that being said, the upside price pressure grows stronger the longer spot prices remain depressed, increasing the magnitude of the next price rally. When steel prices increase, they tend to do so quickly, so make sure you take advantage of the historically low spot and curve prices while they are still available.