Large portion of the industry looks to 2021 as the time normalcy will return to steel mills.
Conditions in the steel sector are decidedly mixed, with demand surprisingly strong in some end-use markets and some regions of the country, yet disastrously weak in others. Overshadowing all is the specter of a surge in Coronavirus cases that threatens to derail the progress the economy has made. Views of the virus crisis have evolved significantly over the past few months.
Steel Market Update (SMU) polls steel buyers—primarily service center and manufacturing executives—twice each month. In early May, when SMU asked readers how quickly they thought they could rebuild their business to pre-COVID levels, the majority saw the virus running its course by the end of July and almost all by the end of the year (see Figure 1). Only 7% felt the crisis could extend into next year.
We have learned a lot about COVID-19 since then, much of it disconcerting. Asked a similar question in mid-July, 43% of the respondents said they expect the virus to be a drag on their business into the first or even second quarter of 2021 (see Figure 2).
Even as authorities work to contain the spread of the coronavirus, steel industry sentiment continues to trend positive. SMU’s Steel Buyers Sentiment Indexes are approaching levels seen at this time last year, prior to the pandemic.
Since early April when Current Sentiment hit -8, its lowest reading since November 2010, the index has improved by 50 points. The mid-July reading of +42 compares to a reading of +49 at the same point last year (see Figure 3).
SMU also asks steel buyers how they view their company’s chances for success three to six months in the future. SMU’s Future Sentiment Index registered +52 in mid-July, an increase of 42 points from the low in early April. Future sentiment was 10 points higher than current sentiment, which suggests that steel buyers remain hopeful about their prospects in the months ahead.
Steel Demand and Prices
Not surprisingly, steel demand and steel prices struggled to gain ground in July. The benchmark base price for hot-rolled steel declined to $460/ton, down by $120 or nearly 20% from the mid-March level of $580/ton prior to the virus crisis. Other steel products had similar declines. The average base price for cold-rolled steel published by SMU on July 14 was $660/ton. Galvanized was selling for an average base price of $650/ton, while plate was at $605/ton.
Lead times for spot orders of steel were relatively short, according to the SMU proprietary survey, indicating that the mills were not that busy and were willing to negotiate on price to win orders. The average lead time for hot-rolled was around 3.8 weeks, while cold-rolled was at 5.8 weeks and galvanized at 6.0 weeks—about a week shorter than in the first quarter.
John Packard, SMU’s President and Publisher, commented on the erosion of steel prices in the second week of July.
“Our sources are advising that hot-rolled base price numbers are being offered in the low $400s for tons. As capacity reopens at integrated mills, the possibility exists for HRC base prices to breach the $400/ton level for mega orders and reach down to the low and mid $400s for smaller orders. SMU continues to have hot-rolled, cold-rolled, and galvanized price momentum pointing to lower pricing over the next 30 days.”
Figure 1. When steel buyers were asked in the spring how fast they could rebuild their businesses to pre-COVID-19 levels, they provided pretty optimistic answers. 70% thought business would be back to normal by the end of August.
SMU keeps a close eye on purchasing by steel distributors as a leading indicator of business activity. According to the SMU proprietary Service Center Inventories/Shipment Index, service center shipments are reported to be 60% to 70% of year-ago levels. Steel Market Update inventories data in July showed service centers reducing their flat-rolled stocks by more than 3% to an average of 62.5 shipping days of supply. Service centers remained reluctant to place new orders as prices continued to erode and demand growth was slow.
Finished steel prices are heavily influenced by the price of ferrous scrap, which is the main feedstock for electric arc furnace mini-mills. Both prime and obsolete scrap traded lower by $10/ton to $40/ton in July as scrap supplies increased at a greater rate than steel production. The experts were predicting that scrap was likely to trade sideways or lower in August, putting further downward pressure on finished steel prices. As one scrap dealer told SMU, “When scrap prices move materially higher again depends on mill demand, and that could be several months away at this point.”
Various mills have plans to restart idled furnaces. Adding capacity to a market that is already oversupplied can only weaken steel prices further.
What the Market Is Saying
Comments from respondents to SMU’s questionnaires reveal widely divergent opinions on the virus crisis:
- “We’re concerned about late 2020 and early 2021 with repercussions of COVID on the economy and construction market.”
- “We’d feel better if we knew how the construction sector is going to react to a second or third wave of COVID-19.”
- “We have another year of COVID news ahead of us, if not more. We need to learn that business and life must happen for our well-being and the well-being of the economy. There may be times specific locations may have to close as cases increase.”
- “I don't see the need for a hard pause like we had to endure in the spring. I think a lot of companies are better equipped to deal with a spike in numbers this time around.”
- “Testing has increased tremendously. Our local civic center is running tests two or three days a week for anyone, even without symptoms. Pausing the economy would be catastrophic.”
- “Conditions seem to be deteriorating, numbers are falling, and there is very little demand at the moment. Perhaps this is just a Fourth of July hangover, or it could be something more nefarious like a second wave of Coronavirus hysteria.”
- “It’s not a question of if another pause will be necessary, but when and for how long.”
- “COVID outbreaks keep a lid on any optimism.”
- “We’re not seeing much data that would suggest any type of rebound in the near future. Mills tried to firm up the market with prices and that failed miserably.”
- “I’m fairly optimistic, assuming business gets back to semi-normal. This being an election year, and the virus being a political weapon, it remains to be seen.”
Steel Market Update Events
SMU has made its annual Steel Summit Conference a virtual event. The conference will still take place Aug. 24-26, but in an online rather than an in-person format. Far more than a series of webinars, the event will use an online platform that will simulate the conference venue and allow attendees to network and communicate with each other in creative new ways. This year’s conference includes CEOs from Nucor, U.S. Steel, Ternium, Cleveland-Cliffs/AK Steel, and Steel Dynamics.
SMU is once again seeking nominations for the SMU NexGen Leadership Award. SMU is dedicated to helping businesses recruit, train, and retain the next generation of talent. Any young, motivated individual under the age of 35 who is currently employed by an organization that uses carbon steel as part of its core business function is eligible for this award, which is co-sponsored by the Steel Manufacturers Association. Qualified nominees will receive a free pass to this year’s SMU virtual Steel Summit Conference.
SMU hosts a free Community Chat every Wednesday at 11 a.m. ET. Each webinar features a different guest—analyst, consultant, economist, or industry executive—who shares their unique perspective on the steel markets and their advice on how to persevere through the difficult times. The webinars are open to all, and you can register for the next event. All the SMU Community Chats are archived at steelmarketupdate.com under the SMU Community Blog tab.
Written by: John Packard, President/CEO of the Steel Market Update, and Tim Triplett, Executive Editor of the Steel Market Update, for The Fabricator.