The trend was especially pronounced in late April and early May – a period when scrap prices were flat or rising while domestic hot-rolled coil prices were falling at a breakneck pace.

To illustrate how perilous such a situation can be - it was flagged as a risk in early January - consider the spread between Fastmarkets' steel HRC index, fob US mill and steel scrap No1 busheling, consumer buying price, delivered mill Chicago. And then tack on $150 per ton in conversion costs.

On April 13, for example, scrap prices - on a short ton basis - stood at $241.07 per ton, down by 10% from a March 6 settlement of $267.86 per ton.

HRC prices fell by 19.2% to $488.40 per ton from $604.20 per ton in the same comparison. While the extent of the HRC drop might have hurt steel mills - and especially electric-arc furnace (EAF) producers, whose primary raw material is ferrous scrap - the busheling decline at least made steel's plunge a survivable event.

EAF producers - assuming a conversion cost of $150 per ton - were roughly breakeven at $391.07 per ton on April 13, leaving a healthy $97.33-per-ton spread between scrap costs and HRC selling prices.

The problem is that scrap prices - which Fastmarkets settles monthly - were steady for the balance of April even while HRC prices - calculated daily by Fastmarkets - continued to fall.

By the end of the month, the spread between HRC and scrap - taking into account conversion costs - was uncomfortably close to breakeven.

US HRC prices stood at $437.80 per ton on April 30, a more than four-year low and down by 10.4% from the April 13 price. This caused the spread between HRC selling prices and scrap, plus conversion cost, to narrow to $46.73 per ton - less than half the level recorded roughly two weeks earlier.

And things were about to get worse.

Oil prices went negative on April 20. Oil, coil and scrap tend to trend together. And there is a particularly close relationship between black gold and ferrous scrap, with prices for these two commodities moving together 92% of the time.

But while oil and HRC might have moved in tandem, scrap prices - and especially those for busheling - bucked the trend due to a scrap shortage stemming from North American automotive plant shutdowns. Auto plants shut in March in response to the Covid-19 pandemic and, thus, ceased generating prime scrap grades, such busheling used by EAF mills to make HRC.

This led busheling prices to settle at $276.79 per ton on May 6, up by 14.8% from April’s settlement. Mills - whether in anticipation of higher scrap prices or in an effort to stop sheet prices from falling further - announced price increases of $50-60 per ton on May 1.

While the increases sent HRC prices higher, the gains did not happen overnight. So the spread between HRC selling prices and scrap plus conversion cost remained thin.

The price for scrap plus conversion cost, for example, stood at $426.79 per ton on May 6 following the settlement. The US HRC index was calculated the next day at $483 per ton, leaving a spread of $56.21 per ton.

The timing was crucial. It is not uncommon for steel industry contracts to be based on prior weeks’ spot prices minus a negotiated discount.

If one had been using the prior week’s price in a contract, for example, the spread between the HRC selling price and scrap plus the conversion cost would have been only $11.01 per ton. And it would have been solidly in loss-making territory for contracts calculated at a discount to the prior week’s spot market number.