Momentum to the downside intensified this week as the prevailing sentiment is increasingly becoming “steel prices are going back to pre-invasion levels.” So, market participants remain on the sideline, sitting tight and waiting for their sub-$1,000 offers from the mills. While we understand why buyers remain cautious, there is a difference between waiting for better offers and taking on unnecessary risk. The most important lesson to learn from the 7-week mini rally in March and April is that the market is different than it was before the pandemic. While prices continue to decline, there will be a point where prices find support. We anticipate that this will be at a level much higher than the historical norms because of elevated input costs for the mills. What happened at the end of February was extreme, but it was not an anomaly. There are risks in both directions and the last 3 months are a prime example of why hedging and risk management are necessary for steel buyers in today’s market.

Turning to the demand side of the equation, our view over the last two years has been that the parts and labor shortages are resulting in pent-up demand which will keep prices elevated as these restraints ease. We still view extended backlogs in that way. However, without resolution, there is potential risk that new discretionary spending and project financing allocated towards steel intensive industries (autos, manufactured and durable goods, construction, appliances, etc.) will increasingly go elsewhere if it hasn’t already disappeared due to inflation.

The chart below shows the main regional Fed Manufacturing Surveys, going back to the beginning of the current expansion cycle, with the May expectations (dotted) and actual readings (solid, when applicable).

May readings have consistently underperformed market expectations, on top of the fact that the growth rates have been trending lower since the end of last summer. This trend is most notable in the Empire State (New York FED) manufacturing business conditions, which has printed well below zero 2 out of the last 3 months. In the coming weeks, a slew of economic datapoints will bring more clarity around the economy and steel consuming demand. While 1 month of poor readings do not indicate a crisis, the combination of worsening sentiment and weaking data are both signs that a cautious approach is the best way to view the current market. At the same time, while we anticipate further downward pressure on spot prices, it is important to keep in mind that the forward curve has provided opportunities to fix prices well below where most of the assessments and physical contracts have printed. Keep that in mind as we approach levels of support in the coming weeks.