Steel
buyers indicate that mill-announced price hikes might stick
Steel
sheet prices have bottomed or soon will, according to most respondents to our
latest Steel Market Update (SMU) surveys. We’ve also seen more people
predicting higher prices in the months ahead.
On a basic level, that’s because we’ve
seen a modest increase in lead times—which are up by an average of 0.5 weeks
recently. Hot-rolled coil (HRC) lead times, for example, had been slightly
below four weeks on average; they’re now at 4.4 weeks (see Figure 1).
Lead times can be an important advance
indicator of pricing moves. A 4.4-week lead time doesn’t mean higher prices are
a slam dunk, but the chances of prices increasing go up considerably if we
start to see HRC lead times averaging five to six weeks.
Also, mills are less willing to negotiate
lower prices than they had been in prior weeks. Recall that for several months,
nearly all producers were willing to discount to bring in orders.
Longer lead times and fewer mills willing
to cut deals comes after a round of $60/ton ($3/cwt) price increases announced
by mills in the U.S. and Canada the week after Thanksgiving. Figure 2 provides a quick snapshot
of price expectations before and after the price hike announcements. (Note:
Plate mills were more willing to negotiate lower prices because Nucor, a
leading plate producer, announced a $140/ton price decrease.)
Before sheet mills announced price
increases, forecasts were divergent. About 60% of people thought prices would
remain roughly where they were. That’s not uncommon. Notable was that nearly
20% thought they would go above $700/ton while another roughly 20% predicted
they would fall into the $500s/ton. That surprised me at the time because
$500s/ton is getting close to breakeven for integrated mills, especially once
you consider that contract prices are done at a discount to spot prices.
The $700s/ton crowd (30%) has since grown,
and only about 12% of respondents think that prices in two months will be in
the $500s per ton or lower. Also interesting is that some are predicting prices
will be even higher than the aggressive target prices of $700/ton announced by
certain mills. That result reads to me like they are expecting another round of
price hikes and they believe those additional hikes will gain traction.
We’ve also seen a modest change in service
center pricing, which indicates that higher prices at the mill level are having
at least some impact downstream (see Figure
3). Namely, the number of service centers reporting that they are
increasing prices (11%) has grown. Also, fewer (46%) are cutting prices.
We saw a similar trend in August and
September following a round of mill price increases. Those ultimately fizzled
though. Here’s the point: One week does not make a trend. I’ll be keeping a
close eye in the weeks ahead on whether service centers continue to show
interest in increasing prices.
Remember, too, that sentiment can be a
significant driver of prices in the short term. We’ve seen a big uptick in
positive sentiment lately. Look at Figure
4.
When asked whether they were optimistic
about their prospects in the first half of 2023, 73% were optimistic. It’s not
unusual to see optimism heading into the new year given that Q1 is typically
busy. Companies restock ahead of construction season in the spring. Automotive
activity ramps back up again following the holidays. Additionally, there are no
longer concerns about year-end inventory taxes.
Still, I wasn’t expecting to see people
this optimistic with headlines about war in Europe, higher interest rates, and
a potential recession. What explains it? Is it bullishness about infrastructure
spending, provisions in the Inflation Reduction Act that will encourage the
build-out of steel-intensive wind and solar power generation, or something else
entirely? I’d be curious to know what your thoughts are.
What worries me a little is that we
haven’t seen much change in overall demand (see Figure 5). Most people (66%)
continue to say that it’s stable. Those saying it’s declining (22%) still
outnumber those who say that it’s increasing (12%). If higher prices are going
to stick, the steel industry is going to need to see demand improve.
Another factor that gives me pause amid
all the bullishness around 2023 is how service centers and manufacturers are
handling their inventories. I thought I might be able to say by now that 2021
was a restocking year, 2022 was a destocking year, and 2023 would bring a
return of restocking. That might still prove to be the case. But it’s not in
the numbers yet. Most respondents to our surveys continue to report that they
are maintaining inventory, and a significant number continue to slash stocks.
Only a handful report that they are building inventories.
A robust manufacturing economy in 2023
hinges on whether and when we see a restocking cycle. If I had to pick one
thing to watch in the weeks ahead—besides prices, lead times, mill
negotiations, and sentiment—it would be buyer inventories.