All experts ask the same question: what is the US steel market going through? Steel prices have skyrocketed since summer. The market turned into its shell at the beginning of the Covid-19 pandemic and began to emerge from it only in August.
Sentiment is always the driving force behind every industry, let alone the steel industry. During the initial outbreak of the virus, investors ditched off-the-shelf projects and buyers collectively tried, in some cases unsuccessfully, to cancel orders from steel mills or chose not to place any orders. Mills and smelters were forced to cut production due to deteriorating demand forecasts.
Yes, hindsight is an exact science, but markets have become inevitably cyclical. After all, they change direction, including during periods that, to put it cliche, are unprecedented. What has been happening since August is no exception.
Steel buyers in the US have in many cases realized too late that when demand falls like dead weight falling off a cliff, there will always be a rebirth sooner or later. Responding too slowly to market movements can often adversely affect buying patterns, stock levels and ultimately profits.
On the other hand, those who understood their forecasting patterns and what factors contributed to the downward cycle probably came out of that smile in a big way.
Demand exceeds supply
Steel producers are constantly comparing their production with market demand, but it often happens that buyers placing orders at the mills dictate the price themselves. However, the refusal to place orders will directly reduce the production capacity of steel mills, which will ultimately lead to a significant reduction in supply, so that the pricing pendulum returns to the producers’ favor.
Note that capacity utilization in the US was 80.7% at the end of October 2019, but it averaged only 55% between April and August 2020. At present, it is 67.9%, which is certainly much higher than the spring-summer level, but still significantly lower than normal indicators. It is clear that demand recovered faster than supply.
But will the rally in US steel prices last? If the old adage that “up” must fall is true, then it is not. The market needed a correction, but, as is often the case in the US, sentiment-driven peaks and valleys regularly exceed what would be expected if fundamentals were the only determinant of price movement.
While an upward correction may continue for some time, it will not last forever. Markets may take some time to calm down after extreme events like the coronavirus pandemic, and the market is no different.
When the mills are back to 80% plus capacity utilization, then we can assume that the steel industry is back to some degree of normality. But even when that time does come, don’t expect price volatility to disappear.