STEEL SUCCESS STRATEGIES: How will steel survive 2018’s successes?

Officially, 2019 is a Steel Success Strategies year, but it feels uncomfortably close to a Steel Survival Strategies year for many steel market participants.

The last time the second “S” stood for “Survival” at SSS XXXII was in 2017. And there was no doubt that SSS XXXIII was a “Success” year. Yet many of the trends that contributed to last year’s bull market in the United States have unwound ahead of SSS XXXIV, which gets underway on Monday June 17 in New York. The conference is co-produced by Fastmarkets AMM and World Steel Dynamics.

Let’s take a step back and see where things stand now versus where they stood a year ago.

HRC drops like a rock
Fastmarkets AMM’s daily US Midwest hot-rolled coil index averaged $31.06 per hundredweight ($621.20 per ton) in May, down 8.4% from $33.91 per cwt in April and 31.1% from $45.10 per cwt in June of last year.

June 2018 marked the highest monthly average since $45.13 per cwt in October 2008. Lehman Brothers went bust in September that year, triggering a global panic that sent HRC prices careening below $30 per cwt before the year was out.

The 2018-19 price drop to date hasn’t been as steep as that in 2008-09. But it could be another decade before HRC prices climb above $45 per cwt again, some market participants have said.

HRC prices are on pace to fall well below $30 per cwt this June. And the Nasdaq Futures Exchange’s HRC contract – which is based on Fastmarkets AMM’s prices – indicates that prices might not claw back to $30 per cwt until June 2020.

What happened?

Back to the scrappy basics
Scrap prices have fallen approximately $80-90 per gross ton over the last 90 days.

No. 1 heavy melt was at $231.79 per gross ton in June, down 11.3% from $261.44 per ton in May and 26.2% from $314.10 per ton in March.

Shredded scrap settled at $259.05 per gross ton in June, down 10.8% from $290.32 ton in May and 23.9% from $340.21 per ton in March.

And No. 1 busheling was at $281.73 per gross ton in June, down 9.8% from $312.25 per ton in May and 24.3% from $372.32 per ton in March.

The takeaway? Domestic mills – especially flat-rolled mills – might want to roll out a price increase to combat persistently lower prices. But it’s hard to do that, especially for mini-mills, with scrap prices falling so fast.

Section 232, what more can you do?
Even if mills announce price increases, many market participants will question their effectiveness. Prices have fallen throughout 2019 despite mills announcing price hikes totaling $4 per cwt on flat-rolled steel.

It’s the opposite of 2018, when prices rose steadily in the first half of the year following the implementation of Section 232 measures. And prices rose last year largely in the absence of mill price increase announcements.

HRC prices averaged $34.37 per cwt in January 2018. They rose to an average of $41.67 per cwt in March of that year following the announcement of Section 232 tariffs and quotas. And they made a final jump to an average of $45.61 per cwt, their highest point in a decade, last July on the trade action being extended to the US’ traditional allies and trading partners – Canada, Mexico and the European Union.

Cutting production is not the USA way
Will mills in the United States – especially integrated mills saddled with higher costs – respond to low prices by cutting production as some companies have already done in Europe? Or will US mills continue to operate above 80% capacity utilization – one of the goals of Section 232 – despite uneven demand?

While planned outages have been taken, no furnaces have been idled.

In the meantime, the steel market is investing billions of dollars to add millions of tons of capacity to the domestic market.

Perhaps those tons will be welcomed into a stronger market in the early 2020s. In the meantime, it remains unclear when prices might recover and what the catalysts for that recovery might be.

Steel companies that hope to succeed this year will have to find solutions – and soon.