02 Jul The State of the Steel Industry
By: Keith Woods, President of Central Steel Service
As you have noticed over the last year, steel has experienced a historically unprecedented run up in prices. Steel is one of the many commodities that has experienced impressive gains this year.
Why is the price of steel so high?
The increase in steel prices has been caused by the simple economic rule of supply and demand. As the supply of steel decreases, the demand–and price–of steel increases. Right now, the supply of steel is very low, making the price of steel historically high. Believe it or not, the price of steel has not been this high since 2008.
Throughout the first half of 2020, several mill producers were forced to shut down capacity due to COVID-19 cases and/or a shrinking demand. Most of the capacity shut down were the producer’s less efficient mills and these mills have not been restarted. As a result, the supply of steel is very low. Beginning in late September, the producing mills began to see an uptick in their demand, a lot of it automotive, as the country began to re-open. This increased demand continued throughout the fall and has continued through the first six months of 2021. But, unfortunately, the production capacity remains unchanged. The mills, never to miss an opportunity to raise prices, began doing so almost weekly and in large percentage increases.
The American Metal Market price index for hot rolled sheet, also an indicator for steel tube since hot rolled coil is the substrate for pipe and tube, was at $460/TN in late August 2020, but was reported yesterday, July 1, 2021 at $1731/TN –an almost 300 percent increase! And since March 2021, the prices have increased 40 percent! The price for steel bar and shapes has also increased more than 60 percent since August 2020, and cut-to length plate is up 300 percent, which is right in line with the coil and sheet pricing.
Due to this continued price volatility, we strongly encourage our customers to be prudent in negotiating their fabrication projects. We encourage the use of escalation clauses or other price adjustment allowances. Historically, you may have considered escalation clauses for projects you did not expect to begin for several months, but during these times of wildly fluctuating and large percentage increases week to week, these clauses need to cover price increases over a much shorter term. You may see a 10-15 percent increase in the price of steel from the time you sign a contract to when you procure the material for a project a week later.
When is the price of steel expected to decrease?
I would think pricing has to be topping out soon, but I do not foresee any price reductions through the first part of 2022. Most mills are still 4-6 weeks behind in their deliveries, and there are zero spot buy opportunities in the market. This means demand remains high and supply is unable to keep up, which leads to continued high prices.
For instance, just last week, there was a fire at one of SDI’s mills that caused a loss of 10 days and almost 35,000 tons of production. Service centers, including Central Steel Service, have been on limited purchase allocations since the beginning of 2021 as producing mills work to catch-up with their backlog of orders. This means that service centers can potentially have difficulty meeting even the basic requirements of their customers.
Looking further ahead, several producing mills have new efficient capacity coming on stream in late 2021 and early 2022, which should improve the supply situation, and therefore the price. However, I am certain the mills will work extremely hard to keep the price up.
Since we have no control over mill pricing, Central Steel Service, Inc. is primarily focused on procuring inventory and maintaining inventory levels to allow us to service our customer’s ongoing requirements. We would encourage you to let us know your upcoming requirements as early as possible so we can plan accordingly!