In honor of throwback Tuesday #TBT, we here at MetalMiner are offering a look back at our top 50 posts of all time. This post from a year ago (December 1, 2014) successfully predicted the fall in prices that the US steel market suffered.
In September (2014), we forecast that US steel prices (then at $680/ton) would fall modestly to $650/ton before holding with a rally into early 2015. We weren’t far wrong – they have dropped to $640/ton and held, while mills are trying to push prices higher early next year.
In early November, we forecast that ferrous scrap would fall to $300/ton in international markets, and they are now very close.
So 2 out of 2 ain’t bad.
US HRC, CRC, HDG Imports
Now here’s a forecast that may cause you steel mill sales reps to spill your expensive lattes. We think that US HR coil could fall to $550/ton or less in Q2 next year. Yep – that’s a 20% decline from prices that they may get in early Q1. (UPDATE: in June 2015 the, the spot price of the US HRC futures contract, as reported in the MetalMiner IndX, was $464.00 per short ton).
Hold on. Isn’t the US economy growing at 3.5%+ and consumer confidence the highest since 2007? It’s true, but the steel industry may not reap the rewards.
Our analysis suggests that apparent flat steel consumption in the US may grow by 11-12% in 2014. Automotive has had a good year, but output is only up 6-7%. Construction hasn’t been bad either – up 4-5% in terms of expenditure.
Overall, industrial production is running 4-5% higher, so yes there have been gains in appliances, packaging and other sectors.
But 11%+ – no way. We think that underlying consumption growth has been around 6%, which means that the rest has gone into the supply chain.
Steel Prices in 2015
So how about next year?
With auto sales now up to 16.5 million units, incremental demand gains in output will be much lower. Even if sales hit 17 million units in 2015, production may be up only 3%. That assumes that all the gains go to US-made vehicles – not a given assuming continued dollar strength. Meanwhile, steel mills have lost 600,000 units previously devoted to Ford’s F-150 that have gone to aluminum, while the accelerating shift to high-strength steel will also impact overall tonnage sales.
Construction may improve on the back of private sector investment, but we are hard-pressed to be more optimistic than 5%, while another year of 5% industrial production would be above most people’s expectations, that still adds up to underlying growth of around 4% for steel demand.
On the supply side, imports are still coming in. While Russia won’t be able to supply the 1 million tons that it did in 2014, Turkish, Latin American and Asian suppliers will be happy to send their steel to the US. Coil imports are now running at close to 1 million tpm compared to an average of 550,000 tpm in Q4 2013 and 700,000 tpm during the first half of 2014. Chinese mills can make north of $200/ton more selling their cold-rolled coil to the USA than they can domestically. They are loading boats as you read this.
Meanwhile, unless we get another polar vortex early next year, we expect U.S. Steel and ArcelorMittal will be looking to sell more in 2015 than they did in 2014.
Therefore, inventories will continue to rise on higher domestic and import supply that is outstripping underlying demand. Mills will continue to tell their clients that the economy is booming and prices are going up and – nudge, nudge, wink, wink – there are fewer of us now, so you won’t be able to get your steel anywhere else.
It’s baloney. As flat-rolled inventories rise to more than 12 weeks’ consumption at service centers and lead times out of mills fall to 4 weeks, mills will become hungry to sell steel and prices will drop. Unlike in September/October when service centers only had 8-9 weeks’ consumption, they won’t just pull back for a few weeks. Mills that have big gross margins thanks to low scrap and iron ore prices will try and discount to keep rolling.
Et voila – HR coil at $550/ton or less.
Guest contributor James May is managing director of Steel-Insight.
Steel-Insight is 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.