New capacity won’t affect market until late 2021, so current pricing levels may be here for a while.
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 it was 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 (see Figure 1). 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, so 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, AR, 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, TX, 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, OH. 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.
Opinions on Steel’s Highs and Lows
SMU polled readers in early January and asked: When do you think prices will peak? The majority of respondents put the timing of the correction in February/March, though nearly one-third predicted it won’t happen until April or later (see Figure 2).
Industry observers have speculated about how much higher steel prices can possibly go and when they will begin to turn around. Surprisingly, there’s been hardly any discussion about the magnitude of the likely correction. SMU asked buyers: Once prices peak, how low do you think they will drop before they bottom out? Very few, 18%, believe prices are likely to descend from the current record highs to lows of $500/ton or less, similar to the decline in 2008-09 (see Figure 3). Another 21% expect the market to sustain prices at well above historical averages in the range of $800/ton to $900/ton. The majority, the remaining 61%, put the next bottom at a still-optimistic $600/ton to $700/ton. Precisely when prices will correct, and how much, is unknowable as the market is truly in uncharted territory.
Figure 1. Hot-rolled steel coil prices have reached a high not seen since 2008.
Issues to Keep an Eye On
SMU will be monitoring a number of key issues in 2021:
- Steel demand and how the high prices are affecting steel users
- Credit issues and how they make it difficult for fabricators and OEMs to finance all the material they need
- The takeover of ArcelorMittal USA operations by Cleveland-Cliffs and how it will handle those assets, especially blast furnaces that are currently idled
- How integrated producer U.S. Steel operates the Big River Steel EAF mill it acquired last year in Arkansas
- Changes in foreign steel offers and import levels, which are at all-time lows
- The ramifications of a new administration in the White House and how it will deal with the Section 232 tariffs and other trade-related issues.
Given the uncertainty posed by the many variables at play in the economy and the steel market, the next few months could prove frustrating for fabricators and manufacturers.
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.”
Written by: John Packard, President/CEO Steel Market Update, with contributions from Michael Cowden, Steel Market Update Sr. Editor, for The Fabricator.