Why are steel prices on the rise again early in 2023?

Historically, the following pattern tends to hold true: As interest rates move higher, so too does the strength of the US dollar. And as the dollar strengthens, it acts as a headwind to the price of commodities.

Thus far in 2023, that pattern has played out as expected, albeit for one exception. Rate hikes announced by the Fed in early February were followed by a strengthening in the US dollar. Shortly thereafter, price rallies of some base metals slowed (see chart below).

 
The lone outlier to the pattern was the price of steel. Around that time, we saw a spike in hot-rolled coil prices. Since the beginning of the year, carbon sheet prices have jumped more than 60%.

 

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So, what has caused steel to buck this traditional macro-economic trend? There are multiple factors at play that have resulted in roughly $560/ton in price increases from steel mills since late November.

Can Imports Help Balance Steel Supply?

Over the past 12 months, import levels have dropped by roughly 6.5 million tons, from 14.2 million tons annualized to approximately 7.7 million tons annualized. Such a significant drop shouldn’t come as a surprise if you look at the domestic vs. foreign pricing pattern during that same timeframe.

The total landed cost of bringing in European or Asian steel during that time was about $850-$900/ton. That was quite an attractive alternative to domestic prices, which reached historic highs, around $1,800/ton. But as domestic prices began to drop, as low as around $600/ton at the beginning of the year, that offshore attraction lessened.

But now as hot-rolled prices are up over $1,000/ton, could buyers once again look to imported steel to hedge against higher prices?

 

Underutilized Steel Capacity

 
Further complicating matters is the fact that capacity at domestic mills remains underutilized. According to the American Iron and Steel Institute, in the week ending on March 4, 2023, domestic raw steel production was 1,664,000 net tons and the utilization rate was 74.4%.

Compare this to year-ago production levels of 1,729,000 net tons with a 79.6% utilization rate. In fact, the domestic capacity utilization rate has been under 80% since June 2022.

In addition, multiple mills have planned outages scheduled for Q2, which can further impact the rate at which domestic steel will be produced.

It raises the question: with little competition in terms of price and volume from imports, will domestic steel mills keep capacity levels low?

 

The Rising Cost of Making Steel

 

Rising steel prices have also been impacted by an increase in the overall cost structure of making steel, particularly raw materials. For instance, the price of iron ore remains elevated. This is due in large part to China, which is a large buyer of iron ore, ramping up manufacturing efforts following the lifting of zero-COVID policies.

Busheling scrap is the raw material most used on the domestic production front. Like iron ore, the price of busheling scrap is elevated. The latest data from the Chicago AMM Index, which tracks the cost of scrap, shows the price of busheling scrap is up $100/ton month-over-month

Futures data suggests that this is a trend that could continue for the foreseeable future. A look at the chart above shows a comparison of futures HRC (hot-rolled coil) pricing to what is considered by some to be the fair-market price for steel (the cost of scrap plus a $300 production premium). That fair cost is around $900 for the balance of the year. Yet, the spread between that and futures pricing is at about $300.

Could that mean that additional price hikes are expected, and thus being priced into the futures pricing model? It will certainly be a trend to watch in the coming months.

“From an over-arching supply standpoint, things are tight right now because of low domestic-production levels and low import levels, and the expectation is that both of those things will correct themselves, it may just take a few months,” says Nick Webb, Ryerson’s director of risk management commodities hedging, who adds he expects import levels to rise in the coming months in an effort to better balance supply.

 

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