Steel mill price hikes appear to be sticking

Steel buyers are unsure of demand for their manufactured goods, and that uncertainty is making industry pundits question if the current trend in steel price increases can continue. Nordroden/iStock/Getty Images Plus

Sheet prices have started out the year strong, and downstream we’re seeing more service centers raising prices roughly in tandem with domestic mills.

No, 2023 is not starting off with a big bang like 2021 did. We’re unlikely to see a market like early 2021 anytime soon, but it’s fair to say the market now is stronger for the steel mills than it was a year ago.

Recall that in early 2022 we saw supply catch up with demand and then overshoot it. FOB mill prices were a lot higher then. Hot-rolled coil (HRC) was at $1,600/ton ($80/cwt) at the start of 2022!

But service centers were already slashing prices with abandon at that time (see Figure 1). That was a clear sign that those prices wouldn’t last.

Here is another interesting point: The waves of mill price hikes that began after Thanksgiving and that have continued into this year have gained traction downstream. That wasn’t the case with a prior round of mill price increases in August/September.

The big question: Does the current market have legs? One thing that might help keep the market going is a shift in service center buying patterns, which you can see in Figure 2.

Only 4% of service centers report that they are reducing inventories. Seventy percent say they are maintaining inventories, and 26% say they are building stocks. We haven’t seen a result that strong since the summer of 2021.

To be clear, I’m not predicting that we’re getting back to a white-hot market in terms of price increases. There is no way we’re going back to the nearly $2,000/ton HRC we saw in 2021. Most survey respondents don’t think we’ll break out above $800/ton (see Figure 3).

But it is possible that the destocking cycle we saw for most of 2022 has ended. Have we entered a restocking cycle? I’m leery of making any such predictions just yet. That said, I think it’s fair to say it’s no secret how contract buyers have behaved over the last few months.

As most of you know, many contracts are based on the prior month’s CRU spot price. (Full disclosure: CRU is Steel Market Update’s parent company.) January contract prices, for example, were based on a discount to the CRU December spot price.

Figure 1. A year ago, the domestic steel mills weren’t in a position of strength as it looks like they are now, particularly with service centers supporting steel price hikes announced in late 2021.

Once mills rolled out post-Thanksgiving price hikes, contract buyers reasonably figured that December’s CRU price was the lowest they’d be seeing in a while. They had also negotiated more generous CRU minus discounts in 2023 compared to the paltry ones they got in 2022.

The result: If you had a minimum/maximum contract, you probably went to your maximum in January. You might have maxed out February, too, following a second wave of mill price increases in mid-December and early January.

A lot of this is momentum-driven. If you think mill order entry in March will be strong enough to support another round of price hikes, you might buy heavy for March too. But can something that appears to be largely momentum-based—buying ahead of the next price hike—continue into the spring? I think a lot will depend on demand.

And that’s where things aren’t so clear. We’ve seen a modest increase in the number of people reporting improving demand (see Figure 4).

But we’re not seeing the kind of turbocharged demand that supported higher prices throughout 2021 and, briefly, following the outbreak of war in Ukraine.

In fact, I’ve had more people than I expected ask me how I think 2023 demand will be. They’re comfortable with their current inventories and their current material on order, but they’re not sure what to do next.

If you buy in the spring and demand is lower than forecast, do you risk being underwater on price when that steel arrives in the summer? Or, if you don't buy and demand surprises to the upside, do you risk running out of steel?

I wonder if that uncertainty might be at least partly related to a loss of faith in forecasts. The last few years have been so unpredictable—because of the pandemic, supply chain problems, and the war in Ukraine—that it’s hard for manufacturers to make forecasts. As a result, it’s hard for service centers and mills to accept them as gospel.

Meanwhile, mill capacity utilization rates remain low. Integrated mills are not going to bring back an idled blast furnace if they aren’t convinced that demand will be strong for the balance of the year.

The cost and timing are less complicated for electric-arc furnace (EAF) mills. Even so, they’re not going to want to crank up capacity unless it’s needed because, if nothing else, that could increase scrap costs.

Figure 2. A vast majority of service centers are building inventory or maintaining current levels, all of which is helping to support the recent increase in steel prices.

One good sign for those rooting for higher steel prices is that lead times, often an advance indicator of prices, continue to extend (see Figure 5).

It’s possible that’s just noise, but if you drill down into the results, which you can do on the Steel Market Update website, you’ll see that trading companies aren’t having much luck offering HRC to U.S. buyers. They report, however, that the prospects of selling offshore-coated, notably Galvalume, or plate to domestic consumers are better.

U.S. mills tend to overshoot the market on the way up and on the way down. You could make the case that U.S. mills brought sheet prices too low in early November, when we hit a 2022 low-water mark of $615/ton.

Might U.S. mills overshoot on prices in 2023? It’s too early to say. But I have noted in recent channel checks that buyers are inquiring more about imports than they had in prior months—even if they’re not yet willing to pull the trigger on offshore buys.

It’s not too early to register for SMU Steel Summit 2023, our flagship event and the largest flat-rolled steel conference in North America. You can learn more and register here.

The conference, slated for Aug. 21-23 at the Georgia International Convention Center, is incredibly convenient because the convention center and surrounding hotels are connected to Hartsfield-Jackson Atlanta International Airport via a free tram. No worries about taxis or rental cars!

We’ll have as speakers who are the top executives from steel mills, service centers, and manufacturers from across North America. We had nearly 1,300 people attend the event last year, so the opportunities to network with clients and suppliers are truly world class. Stay tuned for more details in the weeks ahead!

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