Last week, was a quiet week in the physical and financial steel markets. The trend lower in spot prices continued, and while transactions are rare, they are clearly happening at lower prices than mills initial offerings and leading to a wide range in the assessments. At this point, most mills have closed their orderbooks for December and are sitting tight before offering spot tons in January. In the remainder of this report, we will dig into the economic data points released early last week.

While the overarching trend of strong demand within steel intensive sectors continued, some signals suggest the original drivers of growth may have recently peaked and the lagging industries have yet to hit their stride. First, inventories remain low but are increasing. Second, the slowing YoY growth in residential construction is not being made up for by improvements in non-residential construction spending yet. Finally, the ISM Manufacturing new orders subindex, while still elevated, increased at its slowest pace since the initial recovery began. To be clear, none of these signals are “red alerts” and are likely more illustrative of seasonality and logistics problems rather than precursors of major demand problems. However, this has allowed mills to catch up on orders, operate more efficiently and brought the price off record highs. On the other side, the energy sector, has remained on the sideline for most of the pandemic recovery. This is largely due to the expressed desire from the Biden administration to move away from oil and gas energy sources, however this sector is shaping up to be a potential bridge for steel demand going into next year. The chart below shows the Oil and Gas Rig Counts in the U.S (white) and the 2^nd month crude oil future (orange).

Demand for oil and gas is above pre-pandemic levels, while supply has been slow to react. The current rig count is nearly 50% below the recent peak in late 2018 and consolidation among drillers has increased their discipline in bring new rigs online. Prices have been well above the breakeven level for an extended period and there is a strong outlook going forward. While the rate of change and ceiling are dependent upon whether the administration explicitly stands down, the current number of rigs are far below fundamental values based on the crude oil price. The last thing to keep in mind is that the order and purchase of steel will occur approximately 6 months before increases to the rig count data is reported, meaning orders would be placed right now for late-2Q22.

The chart below is the Platts Midwest HRC index (orange) and the ISM Manufacturing PMI (white). While the overall ISM Manufacturing PMI printed slightly lower than last month, it remains well in expansion territory. This level of sustained expansion (prints above 50) continues to be unprecedented, with 9 prints above 60 in one period. These staggering levels continue to buoy demand for steel and the record high prices.