Steel mill utilization rates dropped to below 70% in March and have stayed there. U.S. Steel, ArcelorMittal and Evraz have all idled mills, while many others have cut utilization amid weak steel demand (particularly anything exposed to oil and gas tubular markets) and high inventories of flat steel products.
Relative Cost of Steelmaking – Scrap vs Pig Iron
Steel imports are still arriving, but will slow sharply in the second quarter and through the remainder of the year as US steel prices are no longer priced significantly above markets in the rest of the world. Weaker-than-expected US manufacturing data will also mean that it will take some time to work those inventories off. As such, we don’t expect US steel mills to reboot until September or so.
Weak demand and plentiful supply means a continuation of low prices.
However, the fundamental position is driven by the competition with pig iron – scrap’s core substitute. Here iron ore continues to slide as China acts to protect its own producers while international suppliers’ output piles up. The bankruptcies/closures seen so far (Atlas in Australia, Cliffs in Canada) are nowhere near enough to balance the market.
Until a bigger supply response is seen (and there will have to be one at some point), the price will move inexorably downwards. Despite the downward adjustment of scrap prices seen so far this year, it is still more cost-effective on a global basis to make steel using iron ore than scrap. That will mean further weakness for scrap-based electric arc furnaces around the world as they switch to either pig iron or billet as their primary raw material. If global scrap prices fall again, US exporters will sell more to the domestic market and hence our concern that $250 per ton is not the floor for US scrap prices.
Guest contributor James May is managing director of Steel-Insight, a steel industry price-forecasting publishing company, based in Toronto. May 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.