It is the time of the year when a lot of managers get asked to prepare next year’s budget.
If you are a steel buyer then you probably need to come up with a number for your boss. It would also help if you were right, or at least had some strong arguments to back you up!
We’re here to help. Early in the summer, U.S. hot-rolled coil prices topped out at $630 per ton. Currently, they are $500 a ton.
- U.S. flat product mills are operating at high utilization rates. Don’t believe the American Iron and Steel Institute crude number.
- The high U.S. prices midyear opened up a major arbitrage. As the chart highlights, a big arbitrage results in rising imports, which have already turned higher. The anti-dumping action simply resulted in a diversion to alternate supply. This will arrive in Q4 and into Q1.
- The combination of higher domestic output and import arrivals led to excess supply and rising inventory.
- Under those circumstances, consumers do not need to buy and lead times have dropped to two to four weeks for HRC, incentivizing mills to discount. With scrap down to $220 per metric ton delivered, electric-arc furnace minimills, in particular, have the margin to offer those discounts.
Prices are therefore likely to drop to $450 per ton in Q4 and potentially even lower in Q1 2017.
U.S. Imports (000 metric tons) and HRC Price Arbitrage ($/metric ton)
However, this rapid decline in prices means that the excess inventory build is likely to be small. Looking at the chart, we see that the “arbitrage window” was realistically only 3-6 months. In the last few weeks, HRC import buying has slowed dramatically, although cold-rolled coil and hot-dpped galvanized imports still make sense.
Therefore, unlike 2014-15, when the arbitrage window lasted more than eighteen months, there is unlikely to be a huge inventory excess building up in early 2017.
Steel-Insight: Prices in 2017
As a result, there is the potential for a rebound in pricing by late Q1/early Q2 as consumers realise that there is unlikely to be ongoing material availability.
However, we don’t see prices back up to $600 per ton or more, with pricing in Q2/Q3 perhaps back to $500-550/ton.
First, fundamental demand is unlikely to show strong growth as automotive build rates are close to a peak and could even drop slightly, while construction demand is struggling amid public sector pullbacks and general industrial output is likely to be flat year-on-year.
Second, additional finishing capacity is being added and U.S. domestic output is likely to be higher. ArcelorMittal Indiana West will be back online in December to feed higher operating rates at the company’s Calvert, Ala., joint venture. Big River Steel is starting up with bigger volumes available through 2017 and U.S. Steel could even bring back its Granite City Works (see our China Market Economy Status interactive storytelling feature for more on Granite City).
Steel Insight is a steel industry price-forecasting publishing company, based in Toronto. James May, the firm’s managing director, has been a steel industry analyst for 15 years and advises some of the major global steel trading companies, steel producers and steel consumers on the outlook for steel pricing and industry trends. For more information, visit www.steel-insight.com.