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After six months of declines, with HR coil falling by as much as 58% from peak levels earlier in the year, a floor has now formed for U.S. sheet prices. Price hike announcements from mills were able to be enforced following a spate of high-volume, low-priced deals that allowed lead times to grow. Import levels also remain low, and declining capacity utilisation rates have tightened the market somewhat. We expect that prices will rise in the coming weeks, although early next year prices will again come under pressure.
While our second weekly assessment for HR coil during the last month of the year was lower m/m (albeit by only $2 /s.ton), in comparison to the prior week, it rose by $49 /s.ton to $667 /s.ton. This means that, for HR coil, mills have been able to quickly pass-through price hikes, but other sheet products have risen by less. CR coil prices rose by $23 /s.ton w/w to $902 /s.ton, while HDG coil prices, including a G90 coating on a .06” substrate, increased by $13 /s.ton to $938 /s.ton. While both CR and HDG coil prices are up from a bottom of $879 /s.ton and $912 /s.ton, respectively, they remain just over $40 /s.ton below the mid-November price.
In the final days of November, the two existing U.S. integrated mill companies announced price hikes of $60 /s.ton, which were then followed by announcements for the same increase by EAF mills. So far, these increases have started to be reflected as indicated by our second week assessments for sheet products in December. Last week, we observed large-volume deals that were done at low price levels, which was indicative that mill lead times would move out and allow for the increases to manifest. Lead times also tend to extend seasonally due to limited production schedules around the holidays. Indeed, lead times for HR coil (as collected by CRU-owned Steel Market Update) shot back up to 4.4 weeks in the first week of December compared 3.9 weeks in late November. Also, as we expected, this week’s volumes were lower than last week’s, and the smaller-volume deals concluded this week were done at higher price levels.
These increases were also supported by the fact that the market itself tightened somewhat given falling capacity utilisation rates and low import levels (see chart). The American Iron and Steel Institute reported that these rates fell below 73% for the first time since December 2020, although they have rebounded a little in the first two weeks of December. Meanwhile, total import levels remain subdued compared to earlier in the year, with U.S. Census Bureau data showing light flat rolled imports at their lowest level all year in November, hovering just above 600,000t.
Mill costs have also increased in December, with scrap rising by $20 /l.ton for prime grade scrap and by $30 /l.ton for obsolete grades m/m. Still, we do not consider this to be a major factor in the most recent sheet price hikes given the relatively small size of the increases and that such an increase is typical for this time of year. Moreover, the spread of HR coil over prime scrap is still higher than historically average at over $300 /s.ton, meaning there is no cost-push. To have a notable impact on the sheet market, prices will likely have to rise by much more in January.
Falling domestic output and fewer imports have helped tighten the US market somewhat
LHS: Light flat rolled imports, kt
RHS: U.S. mill capacity utilization rate, %
Outlook: Price increases likely to be temporary
Although prices are moving up, and will likely do so for a few more weeks, service centre inventory levels will provide a strong oppositional force to this uptrend. The large orders done over the last couple of weeks mean follow on orders will be somewhat lower over the near term and beginning in early 2023 when yet more sheet capacity will be added to the market. Add to that the potential effects from an economic recession, and it will become difficult for prices to continue rising.
CME Group summary
CME Group HR Coil futures contracts have firmly rebounded alongside mill price increases while open interest has now risen for the third consecutive month. The market moved firmly into contango as future prices are well above current prices.
CME Group futures jump higher on mill increases
Prices of CME Group HR Coil futures contracts have jumped after mills announced (and were able to capture) price increases. As of this past Monday, the forward curve for 2023 increased to $773 /s.ton from $730 /s.ton, a 6.2% gain versus prices on 7 November. This price rise has pushed the futures market into a strong contango, where prices in the future are higher than current spot prices.
Due to this increase, we have heard of some buyers reportedly locking in supply for as far out as the first half of 2023. Perhaps this move is an opportunity to lock in supply though it seems to run contrary to current market fundamentals and near-term economic expectations. If current fundamentals and economic projections come to fruition, the forward curve now may be an opportunity for producers and natural sellers of HR coil to lock in some volume and sell forward at what could turn out to be attractive prices.
We have been following this futures market for some time. A year ago in our December 2021 Steel Sheet Monitor, we noted that the forward curve at the time had priced in an average of $1,111 /s.ton for 2022. This turned out to be slightly high as the current average is closer to $1,023 /s.ton with December as the only contract yet to settle. It is worth noting that the war in Ukraine disrupted the market this year with HR coil prices surging by 54% from mid-March to mid-April.
HRC futures in steep contango which may incentivise forward sales
LHS: CME Group HRC contract prices, $/st
RHS: Open interest, contracts, st
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