US recycled steel dealers and steel mills enjoyed a surprisingly robust first quarter to 2023. With weakness in the fourth quarter of 2022, mills and service centres had greatly reduced inventories in expectation of a weak start to this year. But while everyone had planned on some initial upside in the first quarter through new steel restocking, all were surprised at the higher level of buying that ensued, raising both new steel and recycled steel prices.
In an environment of high inflation and rising interest rates, few were expecting a strong recovery at the start of this year. In the final quarter of 2022, buyers of new steel had seen little incentive to purchase any more than their immediate needs as their expectations were for a steadily slowing economy. Rising interest rates also contributed to the decision to keep inventories low. Steel mills planned accordingly in the fourth quarter and bought little recycled steel at that time in anticipation of a decreased future demand.
Although this year’s first quarter was slow to develop, it started to become clear by February that orders for new steel were exceeding anticipated demand. That set off a chain reaction of steadily rising new steel prices and, in a market of low recycled steel supplies, of upward pressure on recycled steel prices.
New steel price increases were predominantly in the sheet market where hot rolled coil began a steady rise as lead times became extended and orders surpassed expectations, with its price quickly surpassing US$ 1000 per ton and, on the back of steady mill price increases, reaching the US$ 1200 level before stalling in April. Bar did not enjoy the same pricing power as sheet, creating a market discrepancy in what the different mills were willing to pay for recycled steel: while sheet mills were eager to drive up recycled steel prices that supported the higher new steel prices, bar mills resisted recycled steel price increases in a bid to help maintain their margins.
That struggle set the parameters for a fundamental change in who was attempting to guide recycled steel price discovery on a monthly basis. The US recycled steel market has traditionally started in the upper Midwest, where sheet mills are dominant. By March, with steadily rising recycled steel prices, bar mills in the Southeast were attempting to curb the enthusiasm of recycled steel sellers by trying to set prices ahead of the northern sheet mills. While those mills enjoyed some success in holding down recycled steel price increases in their regions, it is now less of a struggle as the market has shifted back into decline, with all mills now eyeing recycled steel price declines.
The restocking that fuelled the first-quarter rally has ended and new steel prices now appear to have hit their high for this cycle, as is also the case in the international market where new steel and recycled steel prices have been in decline over the last month. The same headwinds of weaker demand and higher recycled steel inventories are adding to a globally slowing economy. New steel imports into the USA are now at substantially lower prices than domestic new steel levels. After four months of steadily rising recycled steel prices through March, dealers saw their first price drops in April and are anticipating further declines in May.
Rising interest rates have begun to take their toll on consumers. Demand is slowing as consumers shift their summer spending to recreation rather than new steel-intensive goods. At the same time, warmer weather and higher recycled steel prices have increased the supply of US recycled steel. With fewer export options, recycled steel dealers were well aware of the impending market decline and sold heavily in the last cycle. While sales volumes were high, not all orders were completed on a still-tight supply of obsolete ferrous feedstock and logistical backlogs, especially in rail shipments. The mill capacity utilization rate has been steady at around 75% although this is below last year’s average of closer to 80%.
With exports in decline and US consumption slowing, recycled steel dealers are now preparing for the “summer doldrums” and an extended drop in both recycled steel and new steel prices. The cure for high prices was high prices, and the cure for what will subsequently be lower prices will in turn be lower prices. The question is when that cycle begins.
With the May market about to begin at the time of writing, recycled steel dealers are expecting a 60- to 90-day cycle of weaker markets, with the hope of consumers making a return to purchasing more steel-intensive durable goods later in the third quarter. While global economics are weak, US consumers love to spend and still have access to capital. Hopefully, that will be the reprieve on which recycled steel dealers depend to support both a floor in the market and another upward trend in recycled steel markets later this year.