After another week of Covid-19 driving the headlines, we are beginning to see some encouraging signs from an economic activity standpoint. We still do not know how this economic restart will play out concerning new cases, health effects or a “second wave” later in the year. However, we do know that people are starting to go back to work in certain parts of the country, automobile factories are starting back up, WTI crude oil prices are back above $30/barrel and the height of the economic shutdown is behind us. This encouraging outlook reflects in the spot HRC price grinding higher over the past two weeks. The Platts TSI Midwest HRC index settled higher last week at $497.50/st, just below the $500 level that most mills are offering for new inquiries. While mills have been successful at capturing their initial price increase from several weeks ago, they have refrained from restarting any furnaces that have been idled. If economic activity continues to ramp up and production remains limited, prices will continue to strengthen.

While the spot price has moved higher, it is difficult to know if mills have been able to fill their order books at these prices. Much of the steel demand remains either shutdown or skeptical and uncertain of the current price rally. Additionally, high scrap prices continue to eat into mill profitability, even after prices have moved higher. This reduces the mill’s incentive to book business at current prices. Rather than raising prices from current levels, mills may have to drive profitability through securing scrap at lower prices in the next several months. This could be easily achievable as automotive factories, and the economy, ramp up and ease the tightness in the scrap supply.

The forward curve continues to be flat starting in the summer months and into 2021. However, the very front of the curve is still in contango, with the spot price lower than June future, indicating that the market expects further strengthening in the spot price over the next four weeks. For this to occur, the economy will have to continue to reopen, and mills will have to keep idled production on the sidelines. Restarting furnaces due to the recent price increase may stop the rally’s momentum if it occurs before demand reemerges. This would add to supply at a time when inventory levels across the supply chain are elevated. We will likely need to see inventory levels right size and lead times push out for the current rally to be sustained into the fall.