Last week mills began raising their offer prices for spot transactions, initiated by mini mills without an official announcement. However, the integrated mills quickly followed suit and issued price increase announcements, targeting HRC prices above $500/st. This is significantly higher than the spot transaction price seen over the last two weeks in the low $400s. Additionally, demand is still depressed with automotive production halted, energy prices at historic lows and manufacturing factories closed across the nation. So why do mills think that price increases will be supported in the market after a collapse in price over the last two months and amidst largescale economic shutdowns? To put it simply, there is a steel shortage. Mills believe they have curtailed production enough to reflect the current demand situation, and we do too. We will analyze where these supply cuts appeared, and why this will support prices in the future.

Although a small component of the domestic supply picture, imports play an important role in filling the material needs for select products not produced in the US. After all, the country is steel short, consuming more material than it produces. Imports also compete with domestically produced material on a price basis, although the Section 232 tariffs have reduced this to a degree.  The below chart shows the 12 month total of net sheet imports (imports minus exports) to show an annualized impact of the decline in imports.

In the past 12 months, there were approximately 2.5 million fewer tons of flat rolled steel imported into the US compared to the beginning of 2019. Moreover, this amount is likely to increase as pricing differentials make imports unattractive, and supply chains adjust to the coronavirus shutdowns. This shift results in an increase in market share for domestic producers, which increases their pricing power. Therefore, the expectation for continued low levels of imports will allow price increase announcements from the mills to hold more weight.

A more significant factor in the domestic supply landscape is the level of production at mills in the US. Currently, mini mills are producing near 70% of their total capacity, while integrated mills are around 30%. However, cuts in production began several weeks ago, limiting the material produced over the last month during the worst of the economic shutdown. Therefore, the collapse in demand did not produce an inventory hangover like the one we saw during the declining demand environment in the first half of 2019. This time, producers got ahead of the curve and created a short squeeze in the market for steel. Additionally, the scrap market continues to see tightness, which explains why mini mills were the first to push for higher spot HRC prices.

Over the next few weeks, demand returning as the economy slowly restarts will encourage mills to push prices even higher. However, uncertainty is abundant throughout the economy, and a bumpy road ahead is likely in the steel market. A balanced hedging program will remove this volatility, and provide opportunities to advantageously lock in or exit hedges for those who are prepared.