More of the same this week, as spot prices resume their upward momentum in one of the fastest price rallies over the past decade. Currently, mills are offering around $680/st for new HRC inquiries, with lead times extending through the end of the year. Most mill are holding off on quoting January tons, with the belief that waiting to open order books in a rising price environment will be lucrative. The risk for mills is that prices move too high, deterring buyers from placing orders once the January order book opens. However, we do not believe this is likely due to the structural deficit that has developed in the spot market over the past few months. This week, we will analyze this deficit and discuss possible ways in which may be resolved.

In order to understand the current tightness in the spot market, we made several assumptions about both supply and demand over the past 10 months. First, we assumed that the market was stable in the first few months of this year, with the domestic steel supply in line with demand. This includes both domestic production and imports, which have remained stable at historically low levels throughout this year. From the AISI raw steel production data that we include in this report weekly, we estimated changes to the flat rolled domestic production, giving us the supply of steel in the domestic market throughout the year.

Next, we turned to the demand side, attempting to estimate the total steel consumed in the domestic market during the year. We used industry and company specific economic data from these main steel consuming sectors of the economy: Automotive, Construction, Appliance, OEM and Energy. For example, auto production came to a halt during the spring shutdown, but has since continued to increase as the seasonally adjusted annual rate of auto sales has moved back above its recent historical average. Construction spending has been resilient as previously funded projects continue towards completion, and the residential construction market is on fire. The appliance industry has caught a tailwind as more families allocate savings and discretionary income towards home improvement projects. OEM demand initially took a hit as factories shutdown around the country when workers contracted Covid. However, most have reopened and production levels continue to recover. The energy industry has been weak throughout the recovery. Prices remain under pressure as the oil market is oversupplied and rig counts sit at historically low levels. Bringing all of this together, we were able to estimate flat rolled steel demand during the year, and through comparing it to supply, we estimated the monthly surplus or deficit in terms of tons. These components are shown in the below chart.

Projecting these same estimates to the final two months of the year, the accumulative deficit at year-end will be near 3 million tons. Therefore, for the current rally to stop, production will have to ramp up to levels above demand for a period long enough to make up this deficit, which appears unlikely given the discipline from domestic producers this year.