Prices Rise with No Improvement in Demand
Industry leader Nucor (NYSE:NUE), in multiple letters to customers in the last few days, has quietly informed customers of multiple price and surcharge hikes on virtually every product sold for the month of January, reflecting the drama of an increasingly volatile steel pricing environment. Hot-rolled, cold-rolled and galvanized sheet product base prices increased a second $30/ton effective immediately. The company also increased the January raw materials surcharge for contract sheet by $80, $10 more than last week’s increase in prime scrap. Extrapolating these sheet surcharges to the spot market – which is our estimate because Nucor doesn’t make public their sheet list prices – we see roughly a 30% increase in sheet prices off of the bottom in November.
Empty Supply Chain Creates Volatility
Inventories – at the mill, distributor and consumer level – normally cushion these nominal swings in demand. In the current environment, however, the surge in flat-rolled transaction prices isn’t surprising, as we have been forecasting the past month – and is a function of the new pricing environment – the supply chain is empty and even small changes in demand – or perceptions of changes in demand – will drive pricing . Domestic prices are also playing a bit of “catch up” with the rest of the world. Before these announcements, hot-rolled prices were near record lows compared to Europe and China.
“Scarcity Signals” Contributing to Momentum
There are already signs of scarcity in the steel food chain. Even at a 64% operating rate – with plenty of idle capacity – mills are unintentionally sending a message to their customers that they’ve become more full in recent weeks by renegotiating existing pricing commitments, slowing deliveries, pushing out schedules, etc. Remember that we’ve already seen this once – from July through October sheet prices ran up 40% on an uptick in production from an anemic 47% of capacity to a still-ill 62%!
Variety of Increases for Most Products – Surcharges Remain Key
Other upticks include an increase in the January raw materials surcharge of $65 for beams, plate, rebar, merchant bar and structural products. Surcharges remain a key driver of increases and we continue to get feedback from steel buyers that surcharges help them pass through mill price increases quickly so they’re key and valued.
We were surprised to see the company lower January base prices of longs and suspect that will be made up quickly in late January and February as low inventories and a dearth of imported product offset continued anemic demand. Nucor lowered the January base price of beams by $25 and merchant bar by $40, yielding a net transaction price increase of $40 for beams and $25 for merchants as Nucor “split” the difference on the vertical hike for longs.
This is the New Normal
The net result of a combination of bare bones inventories with these occasional demand upticks is likely to bring us to a permanent new normal of oscillating steel prices in cycles far shorter than what we’ve seen in the past. This means more volatility and in some ways more opportunities for those who trade either commodity steel or steel equities.
However, this is meaningfully unhealthy for the domestic and global steel industry as it will wreak havoc with production schedules, capital investment and jobs, jobs, jobs.
Disclosure: no positions