2020 PREVIEW: Factors driving the US hot-rolled coil market

Fastmarkets takes a look at what to watch out for in the hot-rolled coil market in the United States in 2020 after another year of volatility and surprises in 2019.

After a generally profitable 2018 for the US steel industry, 2019 proved more challenging, with major domestic steel producers posting significant year-on-year losses amid atypical buying and holding patterns.

“I think 2019 is a hangover year from a wildly profitable 2018,” KeyBanc Capital Markets analyst Philip Gibbs told Fastmarkets late last year.

Fastmarkets’ daily steel hot-rolled coil index averaged $30.03 per hundredweight for the period between January and mid-December last year, down from an annual average of $41.37 per cwt in 2018 and also down slightly from 2017’s $31.00-per-cwt average. 

The Section 232 tariffs and quotas against steel imports from most countries temporarily created fears about a potential production shortage and led to irregular buying activity. As a result, a great number of hot band buyers entered 2019 holding unusually high inventories, sources said.

“The 232 tariffs psychologically impacted the market to the extent that people were buying or accumulating more metals than they needed out of the fear that they wouldn’t be able to get it,” Gibbs said.

But 2019 demand subsequently proved flat to weak compared with the robust 2018, and the anticipated shortages never came to pass. Hot-band buyers have been reducing excess inventory for most of 2019.

The lack of spot buying resulted in shortened lead times at mills – in some cases to less than a week – which forced mills to sell sometimes at steep discounts to fill their order books quickly.

Those discounts were the main reason mills were able to spur buying activity and push out lead times late in the year. But the extended lead times do not necessarily reflect improved demand, some sources argued. And without strong market fundamentals, buyers said they found higher prices less convincing.

Following several rounds of mill price increase announcements, the HRC index jumped by more than 20% between late October and mid-December. The index stood at $28.22 per cwt on December 13, compared with a three-and-a-half-year low at $23.15 per cwt on October 24.

In the wake of earlier price increases announced in January-February and June-July of this year, hot band prices briefly rallied before falling to new lows.

Some sources concluded that this type of market price cycle typically lasts around eight weeks and decided to stay on the sidelines for that long when prices were rebounding because they believed prices were “doomed” to go down again.

“Everybody is figuring out the game now, and the game is this mini-cycle that goes quickly,” one Gulf Coast service center source said. “We all know the mills will start selling. If they don’t have an order book, they will start discounting the price again. And we see how quickly that goes to the bottom.”

For 2020, buyers booked less contract business to increase their exposure to the spot market, according to both mill and buyer sources. This is likely to increase volatility in the market.

Fastmarkets’ daily steel HRC index, fob US mill was calculated at $28.99 per cwt ($579.80 per ton) on Thursday January 2, unchanged from the last assessment on Tuesday December 31 and down only modestly from $29.03 per cwt on Monday December 30.

“We’ll see who blinks first,” one mill source said of whether mills would again discount prices to fill their order books or buyers would accept higher prices to fill their inventories. “A lot has to do with buyer perception. If they perceive the mills books are tight and demand is getting better, they will support the increase. If they believe they don’t need to buy now because lead times remain short, then the best we can hope is that we set a bottom.”

While trade concerns remain, market fundamentals are and should continue to be the main drivers of price changes, according to both industry experts and market participants.

“The thing needed to turn steel around would be infrastructure spending or [an] increase in either oil and gas or automotive,” one Mid-Atlantic service center source said, commenting on steel demand in 2019.

Sources shared mixed demand forecasts for 2020. Some expect major end-user sectors including oil and gas, automotive, agriculture and manufacturing to improve from 2019, but others predict further softness.

The US rig count has fallen by roughly 25% year on year, according to Baker Hughes, while the number of drilled-but-uncompleted wells (DUCs) has set record highs this year, according to the US Energy Information Administration. 

On the automotive front, some warned about any lagging impact from the United Automotive Workers union strike at General Motors facilities in the US, which took place over six weeks in September and October.

“The GM strike had a pretty large ripple effect through the economy,” Gibbs said during the interview with Fastmarkets. “It didn’t just affect our automotive OEM [original equipment manufacturer] customers [but] the entire chain that feeds into that. That was a long strike.”

Still, Gibbs did predict some strength in the non-residential construction sector, as well as the industrial and appliance markets.

“You put everything together and you’ve kind of got a stable year for [steel] demand,” Gibbs said.

After domestic steel producers announced several sheet expansions in 2018, boosting US flat-rolled capacity by up to 16.5 million short tons per year through 2022, concerns about overcapacity emerged.

“We would welcome some announcement and some rationalization of capacity because until that happens, the prices are [going to] continue to drop,” one Midwest service center source said. “It doesn’t matter what the cost is until you stop producing, the prices are [going] lower.”

One steelmaker in particular has taken action to adjust its output: U.S. Steel.

The integrated steel producer announced on December 6 that it will take a 48-day outage at the No4 blast furnace at its Gary Works in northwest Indiana in the second quarter of 2020. The company previously idled the B2 blast furnace at its Great Lakes Works and a blast furnace at its Gary Works facility.

Market participants have been speculating for months about the potential for additional idlings by the Pittsburgh-based steel producer at its Great Lakes Works or Granite City facilities – especially after U.S. Steel acquired a 49.9% stake in Big River Steel in October, giving the company more exposure to the electric-arc furnace (EAF) production process.

“[U.S. Steel] wants to own Big River Steel, the entirety of it. That’s their number one priority,” Gibbs said. “And they’ve also told you that they’re not making any reinvestment in Granite City and Great Lakes. So I don’t think it’s unreasonable to suspect that those assets will be diminished over time as they focus on Big River, Gary Works and Mon Valley.”

Trade, 2020 election
Once again, trade decisions made by US President Donald Trump are expected to be a major factor affecting HRC prices in 2020, sources said.

“One of the reasons President Trump became the president was because he was attuned to the issues and challenges facing manufacturing in general, and steel in particular,” Thomas Gibson, president and chief executive officer of American Iron and Steel Institute, said. “He talks about steel all the time.”

Indeed, on December 2, Trump announced via Twitter that the US would restore Section 232 tariffs against steel and aluminium imports from Brazil and Argentina. 

While an executive order has not followed Trump’s tweet, those duties could squeeze domestic supplies of slab, push US flat-rolled steel prices higher and create headaches for US slab re-rollers, analysts and market participants said.

At the same time, the US presidential election in November 2020 is something of a wild card for the steel market as a whole, not just for HRC, according to sources.

“Typically, what happens is there’s a lot of uncertainty in election years where a lot of people hold off on making big capital decisions… because you don’t know what the landscape is going to look like until basically after November’s over,” Gibbs said. “People are going to be talking about [election-related news and debates] versus talking about running [their] business until [the election] is over.”

Still, an election year could push members of the Republican and Democratic parties to address some issues related to the steel industry – such as infrastructure.

“If we get past [the] impeachment [inquiry of Trump] early in the year, I’m hopeful that maybe the Congress will look at the transportation [policy] as a deliverable that they can bring home,” Gibson said. 

Still, while developments ahead of the election will affect the market, Gibbs does not expect the result of the election to make any major waves in the domestic steel industry.

“A Democrat who ends up winning the nomination for the Democratic Party is probably going to be a very sympathetic to the to the views of the industry as well and is going to have to compete with President Trump in those very same [steel intensive] states,” he explained. “So, we don’t see potential large changes in the overall environment of the government support for the steel industry.”