Spot Midwest HRC prices are down over $60/st over the last two months after a short-lived rally in July. Before the $100/st rally in July, this report pointed to multiple data points and dynamics that were supportive of higher prices. This week we will analyze these same indicators to see if we are near a similar inflection point in spot pricing.

One indicator that we repeatedly reference and follow is the China price differential, the difference between the Platts TSI Daily Midwest HRC Index and the Platts China Export price, including transportation costs. In the beginning of July, this differential reached a bottom, and the US Midwest price was below the delivered China export price, which we noted as unsustainable. After recovering to normal levels as the domestic price rallied, the differential has begun to fall again. However, it currently sits near $25/st, which is $75 above its previous low. There is not currently the same upward global price pressure on the domestic price as there was in July.

Throughout the month of June, this report highlighted declining and negative profitability for the marginal ton produced, noting that unprofitable production was unsustainable. US Steel’s announcement to idle two blast furnaces in June preceded the ensuing price rise. However, current profitability estimates for the marginal ton produced at both EAFs and BOFs remains positive, despite shrinking over the last two months. Raw material costs today, for both iron ore and scrap, are significantly lower than they were in July. Therefore, it is less likely that mills will remove production from the market, reducing this upside risk.

Finally, lead times have been shrinking which emboldens the buyer’s cycle of delaying purchases to obtain lower prices in the future. However, lead times are still at levels well above the lows they reached in late June, suggesting they can continue to decline before they reach their bottom. Further declines in lead times will continue to pressure spot prices.

These indicators point to lower spot prices in the coming weeks. However, as we saw in the spring, spot prices can decline significantly with the forward curve declining less, creating a steep contago in the curve. For a steel buyer, this means prices on the forward curve may not get lower, even if spot prices decline. We suggest locking in a portion of future buys at current levels, which are over $75 below the historical average HRC price.