The hot-rolled coil market in the United States faces another important year in 2019, one that has already seen many unexpected developments, including a surprise decline in ferrous scrap prices in January.
While many factors will potentially influence the US HRC market, Fastmarkets AMM has summarized five of the most important developments that market participants should watch this year.
1. Increased domestic capacity
Several sheet expansions have been undertaken or announced over the past year, which Fastmarkets AMM estimates could boost US flat-rolled capacity by up to 16.5 million tons per year through 2022. Overall, the domestic market consumes around 130 million tpy of steel, with about half of that volume going into flat-rolled products.
Outside of the US, Sault Ste Marie, Ontario-based flat-rolled steelmaker Algoma also plans to spend estimated Canadian $300 million ($225.7 million) to expand capacity at its steel works. Stelco, another Canadian flat-rolled steel producer, is reportedly undertaking similar considerations.
As a result, sources have expressed their concerns over a potential supply glut in the near future.
But to some the investment in flat-rolled supply ultimately reflects the kind of faith the steel industry has in the future of the US economy.
“When we look at the investment that steelmakers are making... this is showing how they based their decisions on market fundamentals and how they are also willing to invest capital in good times or bad,” Steel Manufacturers Association (SMA) president Philip Bell said during an interview with Fastmarkets AMM. “And I think this is good to know because the strategy of investing through a variety of business cycles is good for steel customers; it’s good for the steel industry.”
Even though domestic steel production is strong right now, it still has not reached levels seen prior to the Great Recession, American Iron and Steel Institute (AISI) president Tom Gibson said, which to him indicates that the market still has room to grow.
It’s hard to determine exactly what influence extra steel capacity will have on flat-rolled markets but supply will, nonetheless, be a critical factor for the market in the foreseeable future.
2. Bilateral and trilateral trade deals
After the US-Mexico-Canada Agreement (USMCA) was signed in late November, market participants predicted that it could have a major influence on the dynamics of the North American steel market. Yet its potential impact on HRC pricing is unclear since the US’ 25% Section 232 tariff on steel imports remains in place versus the two neighboring countries.
Canada used to be a major HRC exporter to the US Midwest market, but the country has retained most product in its domestic market since the Section 232 tariff took effect in June.
Executives at Canadian mill Stelco, for example, said during a quarterly earnings call in November that the company will concentrate on the Canadian market and aim for “zero” exposure to the US market.
But that could all change if separate bilateral agreements on steel are reached between the US and Canada or Mexico, with talks about country-specific quotas currently taking place, sources said.
But many market participants don’t think the progress of USMCA will have any major effects on the Midwest HRC market in 2019. Freight costs for flat-rolled products shipped from Canada appears to be too high, one Midwest distributor source told Fastmarkets AMM, and so the USMCA isn’t a major concern for his company.
Gibson noted that since the USMCA is a “significant improvement” over the North American Free Trade Agreement (Nafta), he doesn’t expect separate deals to be struck on quotas, since the countries might prefer a trilateral solution within the bounds of the USMCA agreement.
“I think it’s in everyone’s interest to get the USMCA move in place. And adding certainty would be beneficial for all three economies... The [President Donald Trump] administration has completed the negotiation for the USMCA. And the clear preference is the trilateral agreement,” Gibson said.
“We want the remedy to be effective,” he added.
At the same time, ongoing discussions about steel tariffs between the US and the European Union, and other countries such as Japan, will be closely monitored by market participants in 2019.
3. Steel demand: oil, automotive and construction
When it comes to price movements, it always comes back to supply and demand. Market participants are already concerned about increased supply but there are also several demand factors to watch out for this year.
First, falling oil prices have added to steel market concerns, with the energy sector a large consumer of steel. Light sweet crude oil futures opened trading at $52.95 per barrel on January 23, down by 30.4% from a peak of $76.03 per barrel on October 3, Yahoo Finance data show.
One southern distributor told Fastmarkets AMM that some of his customers who manufacture equipment for oil and gas applications have expressed concerns about declining energy demand.
Still, the number of active oil and gas rigs in the US stood at 1,050 for the week ended January 18, up by 12.2% from 936 rigs a year earlier, Baker Hughes data show.
Another key end-use market for steel to watch is the automobile industry. In December, news about General Motors’ planned realignment of production at five North American plants – four in the US and one in Canada – left many asking how this could affect the Midwest steel market, in particular. When an automaker such as General Motors closes production at certain plants, this can force certain mills to allocate their contracted steel production elsewhere. This, in turn, can lead to excess supply, one East Coast distributor said at the time of the announcement.
Most recently, ArcelorMittal Tailored Blanks announced plans to shut its Pioneer, Ohio, location due to “a slowdown” in demand for products in the automotive industry. That said, how the auto industry performs in 2019 will be essential to the domestic steel industry.
4. Trump and his administration in 2019
There is no doubt that Trump has had a big influence on the US steel industry since he came into office. In the past year, his actions have sparked volatility in Midwest HRC pricing, arguably more than other supply chain factors. Going into 2019, how Trump and his administration act on steel-related policies will remain essential for the HRC market.
Sources have reiterated the importance, particularly for the steel industry, of getting the government back to work. The US government has been partially shut down since December 22. With many steel and trade-related agencies not fully staffed or funded, this has caused many difficulties for the industry.
“We are at a very critical period... when we need strong trade enforcement, [and] we are in the middle of trade negotiations with other countries,” Bell said. “And we rely on departments like the Department of Commerce, the Office of the United States Trade Representative and many other agencies to uphold the level of playing field and to make sure we have free and fair trade.”
Moreover, whether and when Trump’s promises on infrastructure projects will come together remains an open question.
Gibson is “hopeful” about infrastructure projects, if the incoming House and the administration can work together to solve problems such as funding, which is the key item that has hindered infrastructure bills, he said.
“Whether democratic or Republican, [they] can find common ground... [on infrastructure bills],” Gibson said.
Another key factor in 2019 will be the Section 232 tariff.
“I think it’s important to note that we need to continue to support the 232 measures,” Bell said. “They just fully went into effect a little over six months ago, in June of 2018.”
5. Domestic scrap prices
Scrap prices will potentially play a big role in the price of HRC, evidenced in the initial months of 2019. In January, a surprising decline in scrap prices sent the HRC market downward, a trend it has since continued.
Entering February, downward pressure on shredded scrap prices will likely continue, with auto shredders making steep reductions at the scales. Even with the declines, some shredder operators reported that flows are still not drying up.
Fastmarkets AMM’s weekly price assessment for shredder feed in the Midwest stood at $148.77 per gross ton on January 22, unchanged from the previous week but down by 5.7% from $157.72 per ton on January 7.
The price of No1 busheling scrap in Chicago fell to $375 per ton from $405 per ton in January trade, first time since 2006 that the January ferrous scrap price declined.
Fastmarkets AMM’s daily US Midwest hot-rolled coil index was at $34.50 per hundredweight ($690 per short ton) on January 22, down 4.7% from $36.21 per cwt at the start of the year.
Historically, the price for HRC is broadly aligned to the direction of scrap pricing since much US flat-rolled steel utilizes scrap in the production process. Many market participants have said that domestic scrap prices will be a key factor to watch this year.
Mike Cowden and Nat Rudarakanchana, both in Chicago, contributed to this report.