As we enter a new week with no major changes to the domestic steel market, or our outlook, it is helpful to take a step back to understand the market dynamics from a 30,000-foot view. We are in the mist of one of the most drastic supply driven price rallies in recent history, driven in part by a global pandemic and its economic recovery. It is important to understand how this differs from other price upcycles, which can be driven by other factors including overwhelming demand, restocking and raw material cost pressure. While these factors may also be affecting the market, they are not the main driver of this rally, and cannot relieve the current steel deficit alone. Therefore, to understand how this cycle will play out, we must focus on the different conditions needed to reverse the domestic steel shortage.

As this is currently a supply driven market, many in the market point to two specific threats to the rally: 1) increased production and 2) higher import levels. In order to understand how production levels will change, we must look at profitability on the marginal ton sold by mills. As the mills profit grows, higher production levels become more likely. However, mills are struggling with operational issues at current production levels. Both integrated and mini mills are trying to “catch up” with their order book, still needing to produce and deliver tons that were expected weeks ago. Operations are generally not going smoothly, as maintenance and outages this fall have created an unstable production environment. Regarding imports, we turn to price differentials, which have been rising over the past few months. However, they have not reached levels that historically spur higher import levels, as global steel prices have also strengthened significantly on the back of strong demand in China. Even if imports and domestic production increase as we move into next year, they only play a part of the domestic supply picture.

Inventories have been tightening for several weeks as steel consumers refrained from buying during the uncertainty of the pandemic, and have since destocked rather than pay the current spot price for new material (see Durable Goods section below). Additionally, any service centers with material coming into the fall have since destocked as the market rose and buyers went to service centers instead of mills to fill any current material needs. Depleted inventory levels increase the likelihood that both end users and service centers will need to restock to normalize their businesses as the economy recovers and stabilizes over the course of next year. Even if imports and domestic production levels increase, the buying community has significant work to do in order to right size their inventories to sustainable levels. With the need to restock lingering with buyers across the supply chain, orders at mills are poised to increase moving into next year, further supporting higher prices.