Across the domestic ferrous market last week, we saw a general “throwing in of the towel” throughout the physical market, the future market and the pundit community. Physically, spot HRC prices are nearing $1,300/st, with some mills heard offering potential availability at even higher prices. The buying community seems to have accepted that last year’s prices are nowhere in the near future, and pulled the trigger to secure material at current prices. Speculators in the future market who have held short positions for the past several weeks appear to have reluctantly covered their shorts as the curve moved up astronomically. The future expiring in July was up over $180/st, a 15% move in just one week. Journalist and analysts have come to terms with the fact that their bearish outlooks since last fall have proven flawed at best.  Price targets for the rest of 2021 and beyond are being raised to match the strength that is apparent in the physical spot market. This week we will look at what went wrong with the case for lower prices in order to understand what relevant data and analysis should be used going forward.

Looking back to publications from the fall, predictions for lower steel prices in 2021 were based on three main themes including increased domestic production, increasing imports, and weak demand. Looking at the supply side first, analysts looked at historical trends showing domestic producers bringing on production and capacity as prices rise. They also incorporated planned supply additions into their current supply outlook and doomsday price predictions. However, as production has consolidated into four main producers in the U.S., historical models appear less reliable as production levels remain below pre-pandemic levels despite prices at levels more than two times higher than the historical average.

Imports were supposed to surge due to elevated price differentials and the possibility of easing trade restrictions from a new administration. However, this massive inflow has yet to appear in trade data, as Sections 232 tariffs remain in place for the foreseeable future, and global strength in prices and similarly tight supply in foreign markets prevent rapid changes in the domestic import market.

Finally, we have heard for months that elevated prices were unsustainable because demand would decline as prices moved higher. Interestingly, this rhetoric was most prevalent from publications uninvolved in the physical steel trade and buyers who were sitting on the sidelines. Moreover, it started in November when prices were at $700. What these prognosticators missed was strength in the demand recovery for steel related products. While the economy as a whole recovered a modest pace, the manufacturing sector came roaring back, as evidenced by the below chart comparing the Platts Midwest HRC index (white) and the ISM Manufacturing PMI (orange).

Demand continues to recover at an elevated pace, and we’re seeing steel consuming businesses growing volumes compared to pre-pandemic levels. Even the sectors that were troublesome last year, such as energy, are bouncing back rapidly. The below report is heavy in economic data points that show growing demand for goods as well as continued strength in ferrous related commodity markets across the globe.