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After finding some stability in September, U.S. sheet prices have resumed their downward trajectory in October. These most recent price declines are the result of high inventory levels relative to demand and yet more falls in the scrap market. Demand weakness is likely to persist for the remainder of the year as new capacity continues to ramp up. As such, we maintain our view that prices will be under pressure for the remainder of this year and into 2023 Q1.
Our second weekly assessment for HR coil steel in October was $760 /s. ton, down by $38 /s.ton from the prior month. CR coil steel prices fell by $79 /s.ton m/m to $1077 /s.ton, while HDG coil underwent the largest decreases after falling by $116 /s.ton to $1073 /s.ton. The larger declines for the latter two products are in line with our earlier expectations that their abnormally large spreads of HR coil steel would slowly decrease over time.
Demand for sheet in many key end-use sectors continues to cool, and this is evidenced by a slowdown in year-over-year growth within these sectors and a drop-in service centre shipments. Data from CRU-owned Steel Market Update show that sheet steel shipments from service centres on a daily basis in September were off month-on-month, while mill lead times remain around four weeks for HR coil steel (or shorter in some cases). Meanwhile, although it remained in growth territory, the Institute for Supply Management’s PMI fell to its lowest level since May 2020, and a curtailment in new orders is a signal that October’s reading may fall below the 50% mark.
With demand coming in below forecast, some buyers report that they are having trouble fulfilling their minimum contractual obligations. As such, their appetite for spot volumes has dwindled. However, for buyers willing to make large purchases, prices were transacted at the low end of our price range. In addition, freight costs have come down recently and backlogs have largely abated, allowing customers to receive their material more quickly and in a more cost-effective manner. For now, partial closures for barge traffic on the Mississippi River system have not had a meaningful impact on deliveries, but low water levels could present a risk should they remain low for an extended period of time.
The scrap market also remains in an oversupply situation, and prices again fell month-on-month in October. Prices for #1 busheling fell by more than obsolete grades, causing an unusual inversion for the prime grade scrap premium relative to obsoletes. These price falls were the result of high mill inventory levels for metallics and scheduled maintenance outages. The latter of these factors did not provide support to steel sheet prices given that mills were planned ahead of time for these and put enough inventory on the ground to make up for them. Nevertheless, sheet prices have fallen much more quickly than prime scrap prices, with HR coil steel now at a ~$450 /t premium to #1 busheling. This same premium peaked in 2022 at $831 /t in April and averaged ~$410 /t from 2018 to 2020.
The percentage of material on order for service centres has spiked even as demand wanes
Outlook: Without supply constraints, price slide to continue
Price risks remain largely to the downside as service centre inventory levels appear poised to rise further and new capacity continues to ramp up. Our models suggest that inventories may balloon in the coming month, relative to demand, given a spike in material on order, which hit its highest level in a year during September (see chart). Meanwhile, we maintain our view that underlying demand is unlikely to recover for the balance of the year.
Any price support will therefore have to arise from supply constraints. There is still the possibility of a labour strike at one large integrated mill, and on 10 October, a key rail union rejected a deal with railroads that would avoid a large, nationwide strike. Meanwhile, while barge traffic stoppages on the Mississippi River have yet to meaningfully impact steel deliveries, should low water levels persist it could disrupt supply to some degree. Other upside risks would include unplanned outages or further output reductions at mills, but we have not included any of these upside factors into our base case forecast.
CME Group summary
The CME Group’s HR Coil Steel futures market has continued to fall from August highs while overall open interest increased for the first time since January.
CME Group futures follow physical prices lower
Futures markets are not a forecast, rather they are expectations of the current market extrapolated into the future. The benefit of futures markets is for consumers, producers, and value-add processors is to limit financial risk due to price volatility. Current price activity surrounding the CME Group’s HR Coil Steel futures market certainly reflects recent physical price changes.
Over the past month, the HR coil steel prices on the futures market have fallen alongside lower prices in the physical market. These declines came for not only the near term, but also for all monthly contracts through 2025. As of this past Monday, the average futures price for 2022 Q4 was $730 /s.ton and the price for 2023 was $778 /s.ton. These values reflect a month-on-month decline of $120 and $97 /s.ton, respectively. This value for 2023 is now closing in on CRU’s most recent HR coil steel price forecast of $755 /s.ton.
While futures prices have continued to fall, overall open interest has risen for the first month-on-month increase since this past January. Perhaps the strong level of volume and overall gain of open interest is a signal that various consumers, producers, and processors are moving back into this market as physical prices are slowly moving back towards more historical levels. Or these market participants are wisely hedging their price exposure to variable contracts for 2023.
Futures prices continue to fall alongside lower physical prices
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