Steel Prices Are Exploding To Record Highs

One of our readers writes in that a client just got a letter from US Steel:

Dear valued client, effective immediately price of “seamless steel”  has gone from $900 to $1350 per net ton.”

Yes, a 33% price increase. This is what the Fed would call “inflation” if only the Fed measures rising prices correctly.

Impossible you say? Read the following take from The Fabricator industry mag and then reassess:

Steel prices reach levels not seen since 2008

The benchmark price for hot-rolled steel reached a new record high of $1,080/ton last month, according to our check of the market Jan. 11-12. That surpasses the previous high of $1,070/ton recorded by Steel Market Update (SMU) in 2008, and it leaves steel buyers with some important questions:

  • How much higher can steel possibly go?
  • When will the price peak?
  • Will the eventual correction be a gradual decline or a dramatic death spiral as in 2008?

As fabricators and manufacturers are well aware, steel is in tight supply. Mills idled capacity in the spring in response to the coronavirus shutdowns and have been in no rush to bring it all back online. Tariffs imposed by the Trump administration continue to discourage imports. Demand among the steel-consuming industries is surprisingly robust, unlike the service sector of the economy, which is disproportionately impacted by COVID-19.

The domestic mills are having great difficulty producing and shipping steel on time to their customers, which is putting stress on service center inventories that are well below normal levels. Supply and demand are decidedly out of balance, forcing steel suppliers to focus on the needs of their contract customers first, leaving many smaller spot buyers to fend for themselves. As a result, prices in the spot market have been bid up to historic highs as OEMs and job shops pay huge premiums to get the material they need to keep their production lines running.

SMU data shows that in the past five months the average price for hot-rolled coil has jumped by two-and-a-half times, from $440/ton to nearly $1,100/ton.

For comparison, the prior peak for hot-rolled was $1,070/ton in July 2008, which is equivalent to $1,286 in 2021 dollars. When the economic bubble burst with the onset of the Great Recession that fall, steel prices nosedived along with the rest of the economy, bottoming out 11 months later at just $380/ton. The consequences were disastrous for steelmakers and for OEMs and distributors, which helplessly watched the value of their inventories erode.

Is the table set for a similar calamity this time around? That does not seem likely. The economy was healthy before being tripped up by the pandemic and has rebounded better than initially expected. With the government rushing out COVID vaccines, a new presidential administration pledging a major infrastructure spending bill, and a recovery in automotive sales, the prospects for steel demand in 2021 appear positive.

What Goes Up Comes Down, Right?

But as long as demand continues to outstrip supply, steel prices will remain elevated. Several mills have expansions in the works that will add more than 7 million tons of steelmaking capacity to the market in 2021. Once supply and demand begin to approach some sort of equilibrium, steel prices should moderate, experts say.

Here are the capacity additions to watch:

  • Big River Steel started a second electric arc furnace (EAF) and caster at its mill in Osceola, Ark., last year and is already running it at 90% of its rated capacity.
  • Steel Dynamics Inc. reports that it remains on track to start the hot end of its new, $1.9 billion flat-rolled mill in Sinton, Texas, this summer. The EAF mill will have an annual capacity of 3 million tons. The same mill also has two coating lines.
  • The $650 million expansion at Nucor’s mill in Ghent, Ky., is slated to start up in the second half of 2021. The expansion nearly doubles the mill’s annual hot-rolled coil capacity to 3 million tons.
  • North Star BlueScope expects to finish work late this year on a third EAF and a second caster at its sheet mill in Delta, Ohio. This will contribute about 1 million more tons to the hot-rolled market over the next few years.

Some market participants are concerned that the large increase in capacity that’s coming could send steel prices sharply lower, especially if demand were to falter. Others think those additional tons are unlikely to provide enough relief to steel buyers grappling with limited availability and record-high prices. In any case, those new tons won’t have much effect on the market until late 2021 or early 2022, which suggests that steel prices may remain elevated for longer than conventional wisdom has been predicting.

What Steel Buyers Are Saying

When reaching out to steel buyers, SMU also asks for comments on their business situations. Here are some recent comments:

  • “We’re unable to get supply.”
  • “Supply is restricted. We’re worried about a price collapse and market claims or customers going out of business.”
  • “We’re concerned about the risk of a price correction. What goes up must come down. We don’t want to be caught at the top.”
  • “We are optimistic that business will improve when more and more people are vaccinated.”
  • “We don’t have much to sell, but profits look good short term.”
  • “I would say our prospects are excellent if steel were available.”

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