The invasion of Ukraine means steel buyers will have to deal with greater price volatility in the coming months.Getty Images
Now it seems that all swans are black.The first is the pandemic.War now.You don’t need the Steel Market Update (SMU) to remind you of the horrific human suffering that everyone has caused.
I said in a presentation at the Tampa Steel Conference in mid-February that the word unprecedented is overused.Unfortunately, I was wrong.Manufacturing may have weathered the worst of the COVID-19 pandemic, but the effects of the war in Ukraine could hit markets just as much as the pandemic.
What is the impact on steel prices?Looking back at something we wrote a while back — it feels like it’s in another galaxy right now — prices are dropping rapidly, but it’s risky to write about anything out of fear that by the time the article is published it’s out of date.
The same is true now – except that the falling price is replaced by the rising price.First on the raw material side, now also on the steel side.
Don’t take my word for it.Just ask European or Turkish steelmakers or carmakers what they see now: shortages and idling due to too high electricity costs or shortages in the supply of basic materials.In other words, availability is becoming a primary concern, while pricing in Europe and Turkey is a secondary concern.
We’ll see the impact in North America, but as with COVID, there’s a bit of a lag.Perhaps to a lesser extent because our supply chain is not as connected to Russia and Ukraine as it is to Europe.
In fact, we’ve already seen some of these knock-on effects.When this article was submitted in mid-March, our latest HRC price was $1,050/t, up $50/t from a week earlier and breaking a 6-month run of flat or falling prices since early September sequence (see Figure 1).
What has changed?Nucor announced a price increase of $100/ton in early March after announcing another price increase of $50/ton in late February.Other mills either followed up publicly or quietly raised prices without any formal letter to customers.
In terms of specifics, we recorded some lingering trades at the “old” pre-raise price of $900/t.We’ve even heard of some deals – before Russian troops invaded Ukraine – at $800/t.We are now seeing fresh gains as high as $1,200/t.
How can you have a $300/ton to $400/ton spread in one pricing session?How did the same market that scoffed at Cleveland-Cliffs’ $50/ton price hike on Feb. 21 took Nucor seriously two weeks later?
Metal makers appear to be enjoying a breakout in steel prices, which have been on a downward trend since September, but that all changed when Russia invaded Ukraine.Aguirre/Getty Images
Unfortunately, the answer to this question is all too obvious: Russian troops invaded Ukraine on February 24.We now have a protracted war between at least two important steel producing nations.
One place in the closely interlinked supply chain of the US, Russia and Ukraine is pig iron.EAF sheet mills in North America, like those in Turkey, rely heavily on low-phosphorus pig iron from Ukraine and Russia.The only other near-term option is Brazil.With pig iron in short supply, prices have risen so fast that I hesitate to mention the numbers here as they become obsolete almost immediately.
In fact, the price of pig iron (and slab) is approaching that of finished steel.There are also shortages of ferroalloys, and it’s not just metal prices that are rising.The same goes for the prices of oil, gas and electricity.
As for lead times, they dropped to less than 4 weeks in mid-January.They held on until February and broke out again for four weeks on March 1.I heard recently that some factories have been open for five weeks.I wouldn’t be surprised if delivery times continue to stretch as companies re-enter the market to buy.No one wants to buy until the market bottoms out.We’ve reached this level over the past few weeks and it’s starting to bounce back.
Why can I be sure?First, U.S. prices have gone from the highest in the world to the lowest.Also, people have mostly stopped buying imported goods on the assumption that domestic prices will continue to fall and delivery times remain short.That means there probably won’t be much extra supply.What if the US started exporting steel?Just a month ago, this was an interesting thing in the long run.It is indeed possible in the short term now.
One saving grace is that inventories are not as low as they were in the early days of the pandemic when demand picked up (see Figure 2).We’ve gone from about 65 days at the end of last year (high) to about 55 days recently.But that’s still much higher than the 40- to 50-day supply we saw in the first half of last year.Remember, when supply is around 40 to 45 days, availability becomes a secondary issue for price – causing steel prices to spike.
So give your inventory a big hug.It may at least give you a temporary buffer against the volatility we may face in the months ahead.
It’s too early to put the next SMU Steel Summit on your calendar.The Steel Summit, North America’s largest annual flat and steel gathering, is scheduled for August 22-24 in Atlanta.You can learn more about the event here.
For more information on SMU or to sign up for a free trial subscription, please email info@steelmarketupdate.
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