Steel prices unlikely to rally significantly in near term: analysts
Steel prices in the United States are unlikely to return to last year's highs over the next year due to incoming steel capacity and falling raw materials prices, which could affect steel mills’ profitability, analysts told Fastmarkets
“I don’t think we’re going to see steel prices rally back to levels that we’ve seen in the recent past,” Wen Li, senior metals & mining analyst from CreditSights, said. “The data points to downside risk. You have capacity coming online and broader demand weakness.”
The data points to downside risk. You have capacity coming online and broader demand weakness.
“There’s more capacity coming online in the United States as well as in other countries,” Terry Ryan, managing director at Carl Marks Advisors, said. “That’s a natural progression in a market where the more capacity that’s coming online, the more likely you see prices normalize.”
Andreas Bokkenheuser, equities analyst from UBS, agreed that the uptick in supply may outpace demand, which will in turn cause hot-rolled coil prices to decline and then stabilize.
“The problem with [adding new capacity] is that capacity is growing at two to three times a faster rate than demand is growing. If you’re going to ramp up new capacity, you’re going to be fighting for market share, and to do that you would lower the price,” Bokkenheuser said.
US flat-rolled steelmakers North Star BlueScope, Steel Dynamics Inc (SDI) and Nucor Gallatin have a cumulative production capacity of more than 9 million short tons that already have been brought online or are scheduled to be brought online before the end of this year. With the US continuing its shift to electric furnaces, some of the capacity coming online may be seen as simply replacing blast furnaces that have been idled indefinitely, making it is unlikely to depress prices, other analysts said.
In 2020, Fastmarkets’ daily steel hot-rolled coil index, fob mill US averaged at $29.41 per cwt ($588.20 per short ton), and then more than doubled to an average of $80.62 per cwt in 2021.
In 2022, hot-rolled coil prices touched a 21-month low at $39.25 per cwt on August 29.
The index was at $39.73 per cwt on August 31, falling by 0.82% from $40.06 per cwt on Tuesday August 30 and down by 1.83% from $40.47 per cwt a week earlier.
The rise in steel capacity production comes amid a series of mill outages scheduled for this autumn, which together could potentially disrupt roughly 600,000-800,000 tons of steel production.
However, the scheduled outages are unlikely to change market fundamentals, analysts said.
“Outages will add to a seasonal recovery in demand that will improve from current levels in the coming months,” Fastmarkets analyst Paolo Frediani said. “The outages will not be sufficient to fundamentally alter the supply-demand balance. Our analysis suggests that the price recovery expected in the near term will be modest.”
Outages will add to a seasonal recovery in demand that will improve from current levels in the coming months
“The maintenance shutdowns are likely insufficient to offset demand weakness, while continuously falling import prices also have the option to replace lower domestic supply in the coming months. So, we don’t think the maintenance shutdowns make a large difference for now, in particular with service center inventories still adequate,” Bokkenheuser added.
Fastmarkets’ fortnightly assessment for steel hot-rolled coil, import, ddp Houston was unchanged on the week at $740-780 per ton ($37-39 per cwt) on Wednesday August 31, but was 39.68% lower than $1,220-1,300 per ton on January 5.
In 2022, total flat-rolled imports to the United States from January to June rose by 4.82% to 6.09 million tonnes, compared with 5.81 million tonnes in the same period last year, according to US Census Bureau data.
Declining prices of raw materials
The falling cost of raw materials also could contribute to the downtrend of HRC prices, the analysts said.
The flat-rolled steel market is forecast to resume a downward trend next year, due to factors including scrap prices “holding well below recent peaks” and “competitive import prices as steel markets will trend lower globally on weakening demand and falling raw material costs,” Frediani added.
In April, Fastmarkets’ monthly assessment of the steel scrap No1 busheling, consumer buying price, delivered mill Chicago touched a near 14-year high of $760 per gross ton ($678.57 per short ton) on April 8, but has been falling since then to $405 per ton on August 8.
Bokkenheuser noted that falling prices of raw materials in China would add downward pressure to Chinese steel prices, bringing US steel prices back to mid-cycle levels.
“If you’re bearish on iron ore and metallurgical coal prices — and we are — steel prices should come down along with it, and that’s what we see happening in six, 12, 36 months. In that scenario, US steel prices will go back to mid-cycle levels, at least in the $30-35 per cwt range,” he said.
China’s HRC market has been weighed by a lack of market confidence and sustained weakness in end-user demand, along with declining prices for raw materials.
Fastmarkets’ assessment of steel hot-rolled coil domestic, ex-whs Eastern China fell by 0.26% day on day to 3,880-3,900 yuan ($563-565) per tonne on Wednesday September 1.
Profitability in question
As steel prices stabilize, record profitability for major steel companies may not last, according to the analysts.
“You’re seeing pricing come off of these historic highs and as those prices continue to drop, you’re going to see some challenges of continued profitability that the major players have been seeing over the past six quarters,” Ryan said.
After a slew of second-quarter earnings calls from major steel producers in July, top executives acknowledged falling steel prices and their hedging strategies to combat the downward trajectory.
In Nucor’s latest earnings call, in which the firm reported a record second quarter, top executives anticipated lower earns led by softening steel prices. But the firm said that prices are projected to remain substantially higher than pre-pandemic levels for the next quarter and beyond.
SDI’s chief executive officer, Mark Millett, pointed out that “near-peak backlogs” and strong order books going into 2023 is the “perfect hedge against softening steel prices.”