Industrial metal buying organizations are in a difficult spot these days, as commodities are entrenched in a bull market.
After the initial demand hit that commodities took on at the end of Q1 2020 with the outset of the COVID-19 pandemic, materials prices have skyrocketed. Lead times have lengthened and demand for everything from automobiles to homes to electronics picked up around the middle of the year.
Since then, metals prices have been on a bullish run, putting pressure on buying organizations.
On Wednesday, March 24, MetalMiner hosted a webinar titled “When Will the Metals Bull Market End? (Am I Well Positioned to Get All of the Cost-Downs When Prices Fall?).” During the 30-minute session, MetalMiner CEO Lisa Reisman, Editor-at-large Stuart Burns and Vice President of Business Solutions Don Hauser walked buyers through the current state of commodities markets and strategies for how buyers should approach their metals spend in preparation for when prices eventually come down.
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To metals buyers’ chagrin, prices remain elevated and supply is tight.
When polled, 44% of webinar participants said carbon steel has been their most budget-busting metal this calendar year. Meanwhile, 24% said stainless steel, 20% said aluminum and 12% said copper.
In addition, 66% of participants indicated they are also seeing price increases for value-add items (for example, coatings, gauge and width adders, and additional processing).
US steel prices, for example, have been relentless in their rise. Hot rolled coil closed earlier this week at $1,271 per short ton, up nearly 9% from a month ago. After a modest recovery in May 2020, hot rolled coil dipped again, falling as low as $454 per short ton in late August.
The price has come a long way since then.
Reisman referred to the CRB Index, which has dipped slightly since last month on a slight oil price retracement and potential new lockdowns related to the pandemic. After previously reaching as high as $66 per barrel, WTI crude oil futures have recently dipped below $60 per barrel on a buildup of inventories.
Overall, however, the CRB Index remains on a decidedly upward trajectory.
“Commodities markets, commodities in general — soybeans, orange juice, hogs, etc. — are still in a bullish trend,” Reisman said. “That’s the key thing to know, even though it’s a little bit wobbly at the moment.”
Reisman walked webinar participants through MetalMiner’s support and resistance indicators, available to subscribers through the MetalMiner Insights platform, in addition to MetalMiner’s analysis of trading volumes.
“What it essentially tells us is the strength of the sentiment,” she said. “For example, when we give a buy signal to buy forward, it’s based on seeing significant trading volume or higher-than-average trading volume.”
Aluminum disruption and distortion
Diving into individual metals, Burns overviewed the aluminum market, which has also posted major gains since last spring.
In the US, the aluminum market is tight.
“This year has been characterized by disruption and distortion,” Burns said. “The pandemic bounce-back has been globally uneven, but it’s been broadly robust, especially in China.”
Speaking of China, the country is importing massive amounts of aluminum, Burns added, bringing in its highest volumes since 2011.
As such, with China’s import levels on the rise, that dynamic is straining an already strained global market. Furthermore, long positions on the Shanghai Futures Exchange are rising, indicating investors expect higher prices to continue.
On the other hand, another price driver in the stock and finance trade is “relatively quiet” right now for aluminum, Burns noted.
On the semi-finished product side, freight costs from Asia to the US and Europe have pushed up import prices.
“Some supplying countries are currently unviable due to the freight costs,” Burns added. “They’ve been priced out by a quadrupling of ocean freight costs in the last 6-9 months.”
In other challenges for US buyers, anti-dumping tariffs on aluminum sheet from 18 countries have exerted additional pressure on an already constrained domestic market.
Steel ups and downs
As noted earlier, steel prices have shot up over the last six months and continue to rise, as buyers continue to hope for a sign of a peak and a descent.
However, as with other metals, steel market conditions also reflect tightness.
“If you talk to people that have been in the steel industry for 30 or 40 years, a lot of them will tell you it’s the tightest it’s ever been,” Hauser said.
Mills have turned capacity off and not turned it back on, he added.
Demand continues to be strong, albeit coming from some sectors one might not think about off the bat. For example, amid the pandemic, many consumers sought to take to the outdoors. As a result, demand for steel surged from makers of ATVs, campers, boats, outdoor pools and more.
“Folks can’t get enough material and that’s driving things up,” he added.
Demand isn’t slowing down, either.
“I don’t feel like we’ve reached peak yet,” Hauser added. “Demand isn’t slowing down and nobody is turning new capacity on, really.”
Automotive shutdowns related to the semiconductor shortage could provide some relief by freeing up some steel supply on a short-term basis. Longer term, mills will eventually turn some new capacity on and imports will come in, Hauser explained, so a peak might not be too far out.
Buyers have to do their homework as bull market remains robust
What should buyers do as this bull market rages on?
In a nutshell, be ready for it to come back down, whenever that is.
“That’s a big piece of where the value is at,” Hauser said. “Eventually these prices are going to come back down. [It’s important to do] your homework to get those price-downs immediately. A lot of times, people aren’t ready for that because they’re so busy looking for material like what’s going on right now. … It distracts you from ‘what do I do when it comes back down’?
“Then you’ve missed a month of it on the way back down, and you can’t ever get that back.”
When those prices come down, Hauser said, buyers should immediately have conversations with their suppliers
“They’re not just going to voluntarily give those savings back,” he added. “If you’re tied to an index, you’re fine. … If you’re not tied to an index, that’s when you really have to watch this stuff.”
In addition, buyers should make sure to break out their value-add costs from their metal costs. Furthermore, buyers should only take increases on the metal, not the value-add items.
The MetalMiner Best Practice Library offers a wealth of knowledge and tips to help buyers stay on top of metals markets and buying strategies.