February 3, 2021
How We Got Here
Given demand uncertainty during early COVID lockdowns, domestic steelmakers curbed capacity as manufacturers closed facilities and many service centers reduced inventory. Idling over 50% of domestic production, the domestic supply chain depleted throughout the remainder of 2020 resulting in production challenges, extended lead-times and lean inventories throughout the market today.
After the lockdowns, factory re-openings and a shift in consumer spending caused a sudden spike in steel demand. With a pent-up need for cars, residential construction, appliances, equipment and machinery, steel supply has become very tight across the domestic and global market. Steelmakers slowly restarted some of the idled production, however orders outpaced supply, setting the stage for the current market conditions.
The Industry Today
We are currently in an unprecedented flat rolled steel market. Demand is recovering, supply is still tight, and pricing has hit all-time highs (since 2008). Residential construction has been a key driver to demand recovery, backed by low mortgage rates and the change in people’s lifestyles. Domestic production is starting to recover, but continues to lag behind pre-pandemic levels.
Compounding the supply issue is new leadership across the landscape whose priorities may differ from those of the past. As these mills are looking to better manage their order book, lead times are extending, spot availability is close to non-existent, and contracts are on allocation. Increasing raw material costs with limited imports has led to prices climbing at an accelerated rate over the last few months.
The United States has the highest cash in circulation since World War II. That money is expected to be spent as COVID fades. Historically, pent up cash has led to economic booms. If the pattern holds, and we expect it will, demand for steel intensive goods will remain high. As consumer spending returns, vaccinations accelerate, and states continue to reopen, GDP forecasts for 2021 have been revised upwards from 4.5% to 5%.
Those who have been in the steel industry are familiar with managing various market cycles, however this one feels different. Fundamental shifts to the supply side will most likely result in changes for the foreseeable future. There is new leadership at major domestic mills, a renewed focus on longer term value, and further consolidation and rationalization of integrated production as new mini mills come online.
Things to Watch For