Hot Rolled Steel:
A Case Study of Trouble in the Making
Since hot rolled steel prices began rising late last year, increases have amounted to approximately 66%. Given demand patterns driven by the most recent underwhelming economic reports, this looks to be a case study of trouble in the making.
Yes, that is our view. We know that this globally-influenced U.S. economy has become more and more segmented. We watched and wrote about the post-recession 2010 period where the energy sector pulled the economy out of the recession where other sectors that were far more subsidized failed. No need to rehash all that. The name of the game with us at Preston is numbers so let’s take a look at a few of those we think important.
Let’s begin with imports. Two categories are particularly important – Hot Rolled Sheet (HRS) and Blooms, Billets and Slab (BBS), much of which will become HRS when demand for higher value-add items is fulfilled. The BBS category is the largest where in the last year imports have averaged 528,500 tons per month. Imports peaked here in October 2015 at 755,000 tons. By February 2016 BBS imports fell to a low point of 167,000 tons but have subsequently rebounded to what looks like about 770,000 tons in May. The news from the HRs arena is somewhat different. Averaging 282,000 tons per month over the last 12 months the import level peaked in August 2015 at 381,000 tons. Since that point there have been some ups and downs but lately, the last three months, volume has averaged 209,000 tons per month which is the low point for the 12 month period. Compared to the BBS category there appears to be no uptick here, or at least as of yet. Looking farther back than 2015, we find that in 2013-14 the import numbers were higher than those for the more recent periods. Further, when we look at a 12 month average, 2016 volume is below 2015 in both categories. May could turn that situation around some but clearly volumes on the import side are down. While trade cases certainly explain that to some extent, we point at general economic activity as a significant contributor.
To cement our case, let’s look at domestic steel production. Domestic all steel production averaged 1.851 million tons per week (mt/w) in 2014. In 2015 it was 1.685 mt/w and YTD 2016 it is 1.693 mt/w. Comparing YTD 2016 with the same period in 2015, we find that the current year lags by about 1.2%. It is only in the last 8 weeks that 2016 has caught up to the 2015 pace. Keep in mind that for the purpose of this article, we are equating supply to consumption. Despite the recent improvements in domestic production, when combined with imports, we remain solidly behind last year’s consumption level. Why, we ask? Back to the recent economic numbers to which we referred earlier. Steel intensive industries are just not performing. Energy exploration – a topic our readers are very familiar with – is weak (pipe, rigs, etc.), construction is a lesser contributor than usual (pipe, tube, structural steel, etc.), and automotive has peaked (cold rolled, galvanized, tube, etc.).
So, the question is can demand survive one of the fastest run-ups in pricing since the late part of 2010 into early 2011 which was recovery induced from the worst recession in modern times? Our answer not without some fallout along the way.