Steel Prices: A Look at the Economics

MARKET UPDATE | DECEMBER 3, 2020 

Those who have been in the metal buildings industry for a while are all too familiar with the volatility of the steel market. The cost of hot-rolled sheet peaked in 2004 and then again in 2008 just before the real estate crisis. At the time, this was noted as “the worst steel shortage in history” and the mills were working at 90% capacity. When the housing bubble burst, prices dropped suddenly over a 19-week period, as did capacity to 33%.

The dramatic swings are unsettling, however, familiar. But like everything else that has defined 2020, this recent spike is just another event we are ready to see the other side of. No business, market or economy has gone untouched by the short-term effects of the global pandemic, and the steel industry has been no exception.

The imbalance between supply and demand is without doubt the main driver of US steel prices increasing. With limited capacity—both planned and unplanned—the scales have firmly tipped in the mills’ favor. These prices are intricately connected to the global market for steel, and because other countries are coping with the similar economic challenges, a solution is farther than we would like.

Key Industries Continue Consumption at Pre-COVID Levels

The give-and-take that affects steel price is fundamentally a remarkably simple supply and demand relationship. The construction industry started strong in 2020 and remains so given it is deemed an “essential business” in most states. As building and infrastructure construction continues, so does the consumption of raw material used in rebar, framing, pipelines, and tracks.

Similarly, the automotive industry, which is the second largest consumer of steel products, continues at full strength. In fact, while most manufacturers were expected to suspend production through October due to COVID-19, they surprised the market, and some produced at higher levels than prior years.

Residential New Construction, Renovation & Remodeling Grows

While commercial industries have taken a hard hit this year, those that support the upkeep and renovation of residences have found themselves in a unique position of growth. With social distancing measures in place and the encouragement by authorities to stay put, people are spending more time at home. Homes have become a primary locale for family entertainment and meals once again.

So it is no surprise that the home appliances category has flourished, on top of an already expected growth stemming from a rise in disposable income coupled with rapid urbanization. Discretionary budgets have been reallocated from annual vacation funds to home improvement projects, as demonstrated by the extremely high sales volumes building supply stores like Home Depot and Lowe’s have experienced this year.

Additionally, others who are now working from home on a semi-permanent or permanent basis are taking the opportunity to move to new residences in more desirable locations with home offices, or add-on an office to their existing home. This influx has driven demand for steel-based machinery such as earth-moving equipment.

Health Precautions Tighten Mill Capacity

Due to the nature of COVID-19 and how it spreads person-to-person, government and health authorities have recommended that building operators and companies reduce the number of people confined within a space —in some cases to as low as 50 percent. For this reason, restaurants, retail shops and manufacturing companies have reduced building capacity or adopted alternating shift schedules. The steel mills are no exception to this, putting further constraints on maximum capacity. This has directly affected lead times, extending them to historical highs and making late shipments quite common.

Mill Shutdowns

Given the extraordinary and costly effort required to upgrade mill facilities and equipment, enhancements to aging plants are planned many years in advance. For example, US Steel is making improvements this year that were planned and announced in 2017, around the last time we saw sudden price increases which were related to Section 232. These equipment upgrades require temporary shutdowns affecting industry supply of steel, and the risk associated with rescheduling a planned upgrade is prohibitive even if demand is strong.

To top of off, unplanned shutdowns are occurring for assorted reasons further contracting supply. In August at NLMK, whose operations are based out of Pennsylvania and Indiana, employees went on strike for reasons related to worker healthcare benefits and negotiations are currently paused. The Stelco mill, which is based out of Hamilton, Ontario and primarily serves the Canadian market, fell victim to a cyberattack halting steel output.

Any time that a mill halts or slows production—planned or unplanned—industry supply is affected and adds pressure to the price of these raw materials.

Imports Slow

When domestic production is lacking, large steel consumers typically look to foreign suppliers to offset the supply shortage. It would seem that leveraging the benefit of globalization is an obvious solution to close the gap. However, given the pandemic is also by definition global, mills around the world are facing the same general challenges with some political nuances sprinkled in.

Considering the market conditions already affecting the domestic steel producers, the United States has reduced the quota for Brazilian steel imports by 80 percent. Ferrous scrap prices have increased due to demand in Turkey, and Chinese and German prices have also risen very recently. The effort for steel consuming industries to source internationally is not for lack of trying—but the economics do not support it.

What to Expect

Given the supply challenges the steel industry is facing, prices will naturally rise until the supply curve intersects with the demand curve. This is the case across any steel-consuming industry which means continued inflation through the automotive, appliance and construction industries.

We are optimistic that this is only short-term, pending the widespread availability of a COVID-19 vaccine and thus increased capacities, but it is difficult to say for sure. Unrelated to the pandemic, there is an unusually high amount of mill capacity scheduled to open in 2021. This brings us hope that even if all other factors continue to put pressure on price, we will see some relief in the coming year and resume some semblance of normalcy.

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