After a robust first quarter driven by restocking, US domestic ferrous markets saw three consecutive months of falling prices in quarter two. Falling new steel prices and weakening order books, primarily at sheet mills, took their toll on recycled steel processors. While some saw it as a collapse, in reality it was more a normalization after a highly-inflated market driven by restocking pushed hot rolled coil (HRC) prices too high in the first quarter, reaching US$ 1200 per ton in March before the correction in quarter two took it back below US$ 900.
The high price of HRC in March was not driven by strong demand but more a lack of inventory of both finished steel products and recycled steel to meet that need. Once restocking was completed, markets went into correction mode. April took the first hit on recycled steel dealers as prices dropped by an average of US$ 20 per gross ton. As HRC continued to correct downwards, it dragged recycled steel prices down with it. May saw an average downside of US$ 40 per gross ton, followed by more carnage in June when markets dropped by an average of US$ 50. Exports did not help the US market as prices going into Turkey and Asia were also weaker and subpar to US domestic pricing.
Three consecutive months of market downside took its toll on domestic recycled steel collections. Add into that an abnormally hot summer in the USA and the worst-ever air quality in the Midwest as a result of fires in Canada, and collections have decreased substantially. Despite a more traditional summer of weaker new steel orders, the recycled steel reserve was less than necessary to meet July mill demand. As July trade got under way, it was apparent that an initial downside from mills in the Midwest market was being met with resistance in the rest of the USA. Recycled steel dealers pushed back and were easily able to keep the market sideways across the rest of the country. Despite constrained mill demand, the inventory of recycled steel was also limited and is decreasing.
As July trade is now concluding, there are several more traditional factors at play in the US market. Recycled steel supplies are dwindling in the heat of summer and orders for new steel are weak as consumers are currently spending available dollars on holidays and recreation. That is what we would expect in a normal market, generally referred to as the “summer doldrums”. The caveat is that inventories, in an environment of higher (and rising) interest rates, are low and dropping. Steel service centres have been reluctant to restock in the wake of potentially falling new steel prices and weakening demand. Add to that lower-priced new steel imports, and new steel sales are at best lacklustre. Again, that is what we would expect in the heat of summer.
Nevertheless, summer ends and consumers resume spending on durable goods and their homes in the autumn. If the market is “normalized”, we would expect restocking to occur by the mid to late third quarter. That slightly increased demand, as in quarter one, will be met with limited recycled steel supplies. Dealers’ yards are now low to empty and intakes are slow at best. That should hopefully set up the US recycled steel market for another short-term rally.
We should not take that potential rally as a turnaround in the market. Economics remain weak and the Federal Reserve may not be done raising interest rates. While a recession may be questionable, there are certainly economic headwinds on the horizon. Higher interest rates continue to slow the US economy; other world economies are generally even weaker, as reflected in most major economies showing sub-50 PMI readings, meaning most remain in contraction.
The good news is that the US economy, despite higher interest rates, continues to move forward with a robust jobs market. That translates into consumer dollars, and consumer spending is 70% of the US economy. That should hopefully help to keep markets at the current “normalized” level in the third quarter.