The standoff between buyers and the mills continues another week as each side waits for the other to make their next move. After four straight weeks of HRC price consolidation around $1,950, the physical market still does not have any clear indication of where the spot price is headed. This holdout is important in and of itself because it is the first time since the rally began that the buy side has enough inventory to fill today’s downstream demand. Because of this, lead times have recently dipped to their lowest levels since late November 2020. In addition, we are seeing limited spot availability (offered at elevated market price) from some mills which have been sold out for over 6 months. While the drum beats louder every day for lower prices, it is important to remember that this “feeling” of an impending turnaround has yet to be supported by measurable data. Further, just because buyers are constantly predicting and hoping the price will collapse doesn’t mean it will. The fact is that at this point nothing in the physical market indicates a crash in prices is a likely outcome. While inventories have started to build, a deeper dive into the data shows that backlogs continue growing as well. This would suggest that while buyers currently have a buffer, they do not have enough leverage to wait it out through the end of the year.

However, as the standoff continues and downside pressure that will inevitably cause the rally to end continues to mount, it will be important stay ahead of these moves and to start thinking about support levels for a declining domestic market. What this means in practice is hedging your risk when there are opportunities to reduce your future cost or volatility. While we at FGM are constantly evaluating and promoting opportunities on the HRC futures curve, this can also look like buying imports at a fixed price. The fact of the matter is that no one knows where the spot price will be by the end of the year, much less in the 1^st quarter. However, the spread between current spot prices and 1Q22 import offers is over $450. With less than 3 months to go until the start of 1Q22, the physical market would have to fall by an average of $100 per month for 6 straight months to be able to buy spot material at a lower price in the first quarter. For additional context, this would be a 30% collapse in 6 months and the only time prices fell that rapidly over that short of a period was in 2008. Other than 2008, the closest scenario comes in 2016 where the price fell just under 30% in nearly 5 months only to be immediately followed by a 40% rally over the next 6 months. Additionally, it is important to keep in mind what is different between those times and now:

1. Global and domestic supply chains remain disconnected, with no solutions to logistics, shipping, and freight issues in sight.
2. Inventory levels, while increasing, remain at least 25% below 2008 and 2016 levels.
3. Consolidation and record earnings among the mills have provided them with more capital and leverage than ever before.
4. Current and future demand perspectives remain firm and are even expanding from high levels in some steel specific sectors.

In the coming weeks, we anticipate insight into the 2022 domestic market as more mill contracts come to light, preliminary reports suggest that they will be significantly more favorable for mills compared to recent years. We doubt that spot prices will fall before the mills finalize their 2022 contracts, but lower prices may be in store for 2022. The question for buyers right now is: Are you willing to gamble on a crisis era prices crash, or should you provide certainty to your business by locking in attractive, discounted prices for next year?