03 Dec What’s Happening with the Steel Market?
Those who have been around the metal buildings industry for a while are all too aware of how volatile the steel market can be. The cost of hot-rolled sheet spiked in 2004 and again in 2008 just before the housing crisis. At the time, this was referred to as “the worst steel shortage in history” and the mills were working at 90% capacity. When the real estate bubble finally burst, prices dropped quickly, and with it capacity utilization to 33%.
The dramatic swings are familiar but still unsettling. But like all 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 unscathed 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 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 more distant than we would like.
Key Industries Continue Consumption at Pre-Pandemic Levels
The give-and-take that affects steel price is a 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 residential R&R 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. Once again, homes have become a primary locale for family entertainment and meals.
So it is no surprise that the home appliances category has done extremely well this year, on top of already expected growth stemming from a rise in disposable income and rapid urbanization. Annual vacation funds have been reallocated to home improvement projects, as demonstrated by the incredibly high sales volumes companies like Home Depot and Lowe’s have experienced this year.
Additionally, others who are now working from home and now free of the daily commute are taking the opportunity to move to new residences in more desirable locations with home offices, or building on an office to their existing home. This influx has driven demand for steel-based machinery such as heavy equipment.
Health Precautions Tighten Mill Capacity
Due to the nature of Coronavirus and how it spreads person-to-person, government and health authorities have advised 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 capacity or adopted alternating shift schedules. The steel mills are no exception to this, putting further restricting maximum capacity. This has directly affected lead times, extending them to historical highs and making late shipments quite common.
Steel Mill Shutdowns
Given the extraordinary and costly effort required to upgrade mill facilities and equipment, improvements to aging plants are planned many years in advance. For example, US Steel is making enhancements this year that were planned and announced in 2017, which was when we experienced price increases related to Section 232. These upgrades require temporary shutdowns affecting output 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.
When domestic production is lacking, large steel consumers typically rely on foreign producers to offset the supply shortage. While this seems an obvious solution to close the gap, the pandemic is also by definition global. Thus 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 US 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 beyond our borders 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 vaccine and thus increased capacities, but it is difficult to say for sure. The good news is that, 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.