The physical steel market continued its climb higher this week, on the back of extended lead times and a lack of available spot material. Detailed analysis of the physical market continues to be hampered by lagged data and limited information that lacks sufficient context.  Some mills are showing signs of catching up (which has been described as preemptive preparation for planned maintenance closures in early Q4), while news of unplanned maintenance outages has left other mills further behind than ever. It is important to note, that throughout these mixed signals, no more spot availability has shaken loose. For some buyers, this lack of a clear narrative may have lulled them into a false sense of security as buyers appear to have learned how to operate with the current supply side restrictions. With that in mind, demand remains well intact and appears to outpace the increased levels of production and imports, thus driving prices higher. This week, we received updated imports data through the end of May and will dig in to where things stand, and where they could go from here.

Early-on in our current rally, when it was clear that the U.S. price was outpacing the rest of the world, many participants believed that global differentials and the threat of imports would create a ceiling for how high mills would be willing to increase prices. The chart below is comprised of census data for flat rolled imports through the end May and current extrapolated import license data for June.

Now that we are 10-months into the rally, we see that imports are well above last year and at their highest sustained levels since 2018, which was supposed to kill the price rally. In contrast, all the current data (and our own experience) shows that inventories have, in fact, decreased significantly since January. The result up to this point is clear – Demand strength at high prices continues to be underestimated in analyst forecasts, and buyers’ inability to restock is causing a hand-to-mouth dynamic that is driving prices higher and inventories lower. To solve the structural shortage, sustained higher levels of imports are required. A risk to that occurring is the fact that imports tend to decrease going into the end of the year when taxes on inventory become a part of a steel buyer’s calculation. Operating in an unprecedented price environment increases uncertainty; however, the imbalance between supply and demand has driven the rally up to this point. Consumers not buying material that it is available when they have the backlog to support it will drive domestic prices higher by diminishing competition at the mills.