Last week, the HRC spot price continued to firm around the $1,600 level, as mill offers grind higher. Mills maintain significant negotiating power in the current market with extended lead times, and customer inventories remain too low. From the physical market outlook perspective, current inventory levels continue to be the most significant upside risk in the current demand environment, establishing an elevated floor for the price as restocking becomes unavoidable. In the coming weeks and months, this risk will likely increase as mills have already begun contacting some customers about reinstating contract minimums to catch up on their current orderbook. With the severity of the structural shortage worsening domestically, the traditional playbook is to turn to the global markets for import opportunities.

Over the past year, the Chinese HRC and iron ore prices have led global prices higher, including our domestic price, as they were the first to be hit by and recover from the pandemic. Last week, the China spot price was down 12.9% and the iron ore price has been under significant pressure for the last two weeks. In a normal market, we would view this as a serious crack to the domestic rally that needed to be immediately accounted for. However, the move lower and additional downward pressure comes from government actions to reduce speculation and pollution. The likely result of these events in China is reduced production, which has been a stated goal for months. Supply and demand are not the forces driving their market lower; therefore, we believe they are disconnected from what has fueled the historic rise in global pricing. On a global level, China’s reduced production, in the face of strengthening demand and global steel shortages should only make the problems worse.

On top of the lack of global availability, global freight costs are extremely prohibitive and make importing these limited tons even more difficult. Below is the Baltic Exchange Dry Index over the last 10 years, a shorthand indicator for global freight within the metals complex.

Here we see that, although the index recently declined off its peak, these levels are the highest of the last decade, and are only surpassed by the outlandish prices of the mid 2000’s. As a final point, the 232 tariffs remain firmly in place, and they likely loom large for steel exporting countries both on and off the list. Because of this, we believe that the current threat of lower Chinese prices will not result in enough imported tons necessary to right-size the shortage and has the potential to make it worse. Given all the information available in the current physical market here and abroad, it is difficult to come up with the scenario that would result in a more than $400 decrease in HRC prices from June 2021 to January 2022. And yet, that is exactly what the current futures curve is pricing in.