Slowing demand, high-interest rates — what lies ahead for the US HRC market?

A common theme emerged in July during the second-quarter earnings calls of major steel producers — many are highlighting their hedging strategies against deteriorating spot prices for hot-rolled coil

Steel Dynamics Inc (SDI) noted “near-peak backlogs” and strong order books going into 2023 as the “perfect hedge against softening steel prices,” whereas Cleveland-Cliffs said lower spot prices would be “mitigated by fixed contractual prices” that make up nearly half of the company’s sales.

This focus on hedging against softening spot prices comes amid a tumultuous post-pandemic world further jolted by Russia’s invasion of Ukraine in February this year, which dramatically altered trade flows and redrew global economic lines.

The resultant rise in the cost of raw materials, especially energy costs, has put a dampener on near-term demand projections in the United States, and as a result, most buyers canvassed by Fastmarkets sounded cautious when commenting on market trends.

US customers are now battling burgeoning inflation, and the consequent hike in federal rates have made end users wary of how robust underlying demand is in the short term, sources say.

Most service centers are destocking and only buying opportunistically, on a need basis, sources repeatedly told Fastmarkets during the second quarter. This was confirmed by Cleveland-Cliffs chief executive officer Lourenco Goncalves on July 22 during an earnings call.

“US buyers are very cautious, keeping inventories as lean as they can,” a trader said.

A producer source concurred, saying: “It is a summer slowdown combined with an industry slowdown. With inflation, there just seems to be a global slowdown.”

A distributor source said customers could buy flat-rolled sheet from “any part of the country now, as people are simply not buying now.”

On June 15, the US Federal Reserve approved the largest interest-rate increase since 1994 — 0.75 percentage points — in a bid to curb record inflation. Last month, the annual inflation rate in the US rose to 9.1%, its highest since November 1982.

Production cuts, large contract order to offer reprieve

Prices for hot-rolled coil have fallen dramatically in the US since the second quarter of 2022.

Fastmarkets calculated its daily steel hot-rolled coil index, fob mill US at $43.37 per hundredweight ($867.40 per short ton) on Monday July 25, down by 42.7% from a recent high of $75.65 per cwt on April 8.

The HRC index seems to have stalled for some time though, having hovered at $43-45 per cwt for the last three weeks.

This stasis may be because the market is close to reaching a new baseline, some market participants have said, though others point out that the price floor is still some time away.

“US mills will need to cut some production to stop the price deterioration,” the trader said.

Flat-rolled steelmakers in the US have more than 13 million short tons of new production capacity planned or under construction, but analysts do not foresee a glut depressing the market significantly in 2022.

Last week, SDI’s chief executive officer Mark Millett said its new electric-arc furnace mill in Sinton, Texas, would lose 100,000-150,000 tons of production this year due to electrical issues this month.

Additionally, Goncalves said Cleveland-Cliffs would not build an EAF at its Middletown Works in Ohio.

Apart from these developments, the US HRC market is abuzz with talks of a large contract order from a tubular company — said to be around 240,000 tons spread over the next one-and-a-half years — that will be split between two domestic producers.

This large order will “pull out some HRC monthly from the domestic market and help prevent desperation pricing,” a second producer source said.

Fastmarkets has reached out to the buyer but has not received confirmation regarding the contract order at the time of writing.

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