Spot prices resumed their rally last week on the back of another round of mill price increases, pushing above $600/st for the first time since spring of 2019. While the move up in prices has been swift, the physical spot market remains quiet with few transactions. Panic within the buying community has subsided slightly as buyers are finally accepting the fact that higher prices are the new normal. However, the market continues to get tighter as lead times push out and service center inventories are consumed. This supports the recent price increase and signals that even higher prices are ahead. The forward curve popped last week, especially in the front of the curve, where the expectation is for prices to reach at least $625/st in October and November. While further increases are priced into the market, we realize that this is a mean reverting product, and the higher prices go, the greater the downside risk become. Many have pointed to a stalling economic recovery with additional fiscal stimulus delayed, slowing job growth and the uncertainty around a vaccine, the election, and Covid-19 as temperatures cool. This report will highlight several of the economic data points released last week, analyzing them within the backdrop of the steel market and changing preferences due to the pandemic.

A major risk for the economy as it recovers from the shutdowns earlier this year is the high unemployment levels that will be a drag on future consumer spending and economic growth. Moreover, monthly increases in job gains have slowed as fiscal benefits lapse. However, not all industries have the same influence on the steel market. The below chart compares job openings in all sectors of the economy (white) with manufacturing job openings from yesterday’s August JOLTS release.

While the economy as a whole has slowed in terms of adding jobs, manufacturing companies are showing confidence in their outlook and future demand expectations by increasing their labor force. A similar divergence can be seen in the September auto sales data (below), where the seasonally adjusted annualized rate of automobile sales rose above the 10 average. This occurred in September despite a slowing rate of job growth, which tends to be a main driver of auto sales. A possible reason is the growing number of people moving out of cities and needing to buy a car to support their new lifestyle. The recent trend in construction spending data (below) supports this explanation, as residential spending is growing while non-residential spending growth has stalled.

A population shift, caused by the coronavirus pandemic, from congested cities to suburbs and rural areas will have ramifications for the economy. The majority of the economy exists within the services sector, which is more prevalent in urban areas with large populations, restaurants, and retail. However, when considering these changes from a perspective in the steel market, they appear to be beneficial for steel demand. Home buying, home improvement, warehouse and storage construction, delivery trucks and auto sales all entail higher demand for steel in the future, supporting a higher price level.

The chart below shows the relationship between the Platts Midwest HRC index and the ISM Manufacturing PMI over the past 10 years.