The dynamics affecting the steel market are essentially unchanged over the past week – spot prices moving higher, higher future curve, lead times remain extended and an extremely tight spot market. Even scrap prices traded higher in November, a rarity for this time of year. However, the big news came early this week from Pfizer regarding encouraging results from their Covid-19 vaccine candidate. Markets reacted positively with oil moving up 10%, stocks up 4% and even HRC futures increasing over 3%. An effective vaccine, from the perspective of the steel market, would be constructive for confidence in the recovery and longer-term demand. However, in the immediate term, the effect is likely minimal. There are no signs that the market is loosening, and the current dynamics appear poised to continue. The economic data points in the below report support the strengthening steel demand described in last week’s market commentary. This week’s commentary will focus on the supply side, specifically how the import market may evolve over the coming months.

Many within the steel market have doubted the current rally, pointing to expected furnace restarts and increasing production levels as catalysts for lower prices. However, this has not materialized, and now those who have been left without material are hoping imports may help alleviate this steel shortage come January. Due to tariffs, quotas and extended import lead times, next year is the earliest the domestic market could see any surge in imports. However, to understand the viability of importing material as domestic prices surge, we must also consider prices in around the world. Because of the size and influence of China’s steel market, its price is a proxy for the global price. The below chart shows the Chinese HRC active future on the Shanghai Futures Exchange (in CNY).

Over the past few months, the Chinese domestic HRC price has also been on a tear, rising to historically high levels. The rally has been driven by robust domestic demand, as significant stimulus aids their economic recovery. However, a rising Chinese, and global, HRC price makes selling material in the United States less attractive. For example, producers in Southeast Asia can export steel to nearby China and attain these higher prices, rather than pay for freight and traders to send their steel to the U.S. Interestingly, China imported more steel this summer than in any time in the recent past.

There are a few other considerations when discussing imports. First, a domestic importer must understand how lead times relate to the forward curve prices. For instance, import lead times tend to be 3-4 months, but the price on the domestic forward curve in the first quarter is approximately $50 per ton less than the current spot price. The curve does not predict the future price, but it does allow a buyer to lock in that price for tons in those months. Therefore, the import price should be compared to the price on the curve when the material will arrive. In addition, foreign exchange rates are important in any discussion about global trade. We have seen the US dollar weaken significantly over the past year, meaning it takes more US dollars to buy the same good in a foreign market. This makes it less attractive for both those sending goods to the US and domestic buyers of foreign goods. The above factors all must be understood when attempting to forecast import levels over the next few quarters, and the current dynamics lead us to believe that the domestic steel shortage will not get any significant help from the import market.