It’s beginning to look a lot like a steel market downturn. Fastmarkets examines whether that trend is confined to steel - or whether the broader global economy is in trouble.
Hot-rolled coil prices have begun reflecting trends not seen since the 2008 global financial crisis and its aftermath - the Great Recession. Fastmarkets has taken the pulse of markets in the United States, Europe, China and Turkey to get a better sense of where HRC stands in these volatile times.
US HRC limbo: How low can it go?
One point to keep an eye on: Fastmarkets’ price assessment for hot-rolled coil in southern Europe has been below the Chinese export price for the last two months. The southern European price averaged $461.97 per short ton ($23.10 per hundredweight) at the midpoint in May, modestly below the Chinese HRC export price average of $467.01 per ton, according to Fastmarkets’ data.
The European HRC price is down 27.5% from a recent peak of of $636.68 per ton in late March 2018. And that price has averaged more than $500 per ton only once this year - in February, when the assessment averaged $501.29 per ton.
The steep decline compared with 2018 and the persistently low prices this year led ArcelorMittal to announce one wave of production cuts at its European operations in early May, followed by another announcement late in the month.
Why do Europe and China HRC matter to the US? Think of it as steel's version of an inverted yield curve.
The southern European HRC price has not fallen below the Chinese HRC price since January 2009, when the European and Chinese prices averaged $479.25 per ton and $498.95 per ton respectively. The US price that month averaged $520 per ton.
But things were different a decade ago in one very important way: The US led prices down during the 2008 financial crisis, which was sparked in large part by a domestic housing bubble. The US HRC price bottomed out at $385 per ton in June 2009 - less than half their June 2008 average of $1,080 per ton, according to Fastmarkets' archives.
The US HRC price in June 2009 was well below the prices seen in southern Europe and China - $478.05 per ton and $444.52 per ton respectively. And the $600-per-ton mark recorded in the US in January 2010 marked the beginning of recovery that continued largely uninterrupted until an oil price crash in late 2014 and 2015.
In recent months, in contrast, Europe has led prices lower. And US prices might have some catching up to do unless world prices rebound. The US hot-rolled coil price crashed moved $600 per ton in late May and shows no immediate signs of rebounding given scant spot market activity during the northern hemisphere's typically slower summer months.
Prices below $600 per ton might be uncomfortably close to breakeven for some integrated mills. And ArcelorMittal’s production cuts in Europe could foreshadow curtailments at other companies and in other regions of the world, Keybanc analyst Philip Gibbs warned in a late May research note.
“We expect other steel producers, in Europe and globally, could more aggressively curb supply as global finished carbon sheet steel pricing falls below marginal production cost,” he wrote.
“That’s not our business, to sell and make no margin,” one mill source said, adding that it might be time for US producers to counter a buyers’ strike with a “mill strike.”
No production cuts have been announced in the US - yet.
That might be because there is an important structural difference between the US and European steel markets. Integrated flat-rolled mills in Europe - unlike those in the US - don’t face intense competition from mini-mills that are able to follow prices lower thanks to a lower cost structure and lower scrap prices.
Integrated mills might have little choice but to chase prices lower or lose market share to mini-mills, some sources said.
“We’re not to the bottom, and the mini-mills are not going to stop - and they’re the ones who control the price on the way down,” a second mill source said.
Europe hits the brakes, hikes the price
While US market participants think HRC prices are more likely to find an abyss than a floor, sources in Europe contend that prices have begun rebounding after hitting bottom.
European HRC prices are expected to remain stable in the first half of June, thanks to reduced mill output and a lack of competitive import offers. And prices might rise slowly toward the end of the month once buyers re-stock, sources said.
That’s a big change from the second quarter, when the European HRC price fell on poor demand. ArcelorMittal announced two waves of production cuts in an attempt to address the resulting supply glut and to keep prices from falling further.
Higher prices should result if other European mills cut production, too. And some might already have done so.
ArcelorMittal “is seeing other European steelmakers curb output as well” without “being as vocal about it,” Keybanc’s Gibbs wrote in a separate late May research note, recapping comments made by ArcelorMittal management at an industry conference.
After those cuts, steelmakers announced price hikes. European flat steel producers, including ArcelorMittal and Marcegaglia, have increased offer prices for HRC. Others have stopped discounting.
Higher offers have not been reflected in transactions yet. But prices have at least stopped falling.
The midpoint of Fastmarkets’ weekly price assessment for HRC in northern Europe was $491.89 per ton ex-works on May 29, up modestly from $490.94 per ton a week earlier. And the midpoint for the assessment for southern European HRC was at $461.46 per ton ex-works on May 29, up 0.7% from a $458.05 per ton one week earlier.
Turkey: Lower US tariffs increase steel’s hopes
Demand for flat-rolled steel remains weak in Turkey. But exports have strengthened since the US reduced its Section 232 tariff on Turkish steel to 25% from 50%.
Negative sentiment had dominated Turkey’s domestic steel market since August 2018, when the Turkish lira lost significant ground against the US dollar in the wake of US President Donald Trump doubling of Turkey’s Section 232 duty.
But steel prices have been increasing in the country since those duties were reduced last month. Domestic offers for hot-rolled coil in Turkey averaged $483.08 per ton ex-works at the end of May, up 3.9% from $464.93 per ton on May 17 - the day Turkey’s Section 232 tariff was halved.
Turkish producers should not to raise prices too quickly because Europe is a bigger market for Turkish material than the US, and prices in Europe are lower than those in the US.
And prices in the US have been falling fast, too.
Turkish steel shipments to the US are still subject to a 25% tariff, in addition to freight costs of approximately $45 per ton, Turkish sources noted. That means Turkish hot band may be priced higher than material from some US mills.
US prices have fallen hard since Turkey was hit with doubled Section 232 duties last summer.
Fastmarkets AMM’s daily US Midwest hot-rolled coil index stood at $586.60 per ton on May 31, down 36% from a nearly 10-year peak of $916.80 per ton reached in early July 2018.
Turkey will be celebrate the Eid al-Fitr holiday in the first week of June, to mark the end of Ramadan. Prices won’t change much during the week because of soft demand at home and abroad, market participants predicted.
China brings the tons, breaks the floor
Trends in China - the largest steelmaking nation in the world - cast doubt on the sustainability of a potential HRC price rebound in Europe or Turkey.
China’s hot-rolled coil prices have fallen on weak demand in both the domestic and export markets.
Despite increasing raw material costs - iron ore prices hit $106-108 per tonne in late May - mills have had to lower prices to secure orders, sources told Fastmarkets.
The price for ex-warehouse HRC in northern China averaged $507.69 per at the end of May, down 3.6% from $526.43 per ton a month earlier. Spot activity has remained slow despite lower offers because market participants expect prices to fall further.
That bearish outlook comes in part because at least 13 HRC production lines - capable of making 31 million tonnes per year - are under construction and expected to start operations this year.
To put that in perspective, annual US steel consumption - flat products, long products and tubular products - totals about 115 million tons.
Making matters worse: Downstream demand is unlikely to improve.
Output in the automobile sector - one of the main consumers of flat-rolled steel - fell by 15.8% to 2.02 million units in April, according to China's National Bureau of Statistics.
Chinese export prices, meanwhile, have slumped to around $500 per tonne fob. And some mills are in urgent need of exports because they do not have enough domestic orders.
“Although our official offer prices are $515-520 per tonne fob, the actual tradeable prices will be as low as $500-505 per tonne fob if a mill really means to sell,” a source at an eastern China-based mill said.
“Overseas buyers are barely bidding, seeing the big drops in China’s domestic HRC prices. They are waiting and will only place orders when prices bottom out,” he said.
Some deals have been reported even lower in recent days, at around $490-495 per tonne fob, a Beijing-based trader said. “Most market participants are bearish on [the] price trend,” he added.
Serife Durmus in Bursa, Turkey; Maria Tanatar in Dnepr, Ukraine; and Miranda Song in Shanghai contributed to this report.