The price doesn't matter

Typically, I create sections for these reports: raw materials, policy, regional markets (US/Canada). I do this for the reader but also to help me create a message that aligns. However, tonight as I wrote my notes on why I think the price of steel is moving and where it will move, I see all these parts intertwined. All these pieces are so interconnected today.

I hope you enjoy reading this report as much as I enjoyed putting it all together to get a deeper understanding of the steel industry as I see it today.

Raw materials

The closure of the Strait of Hormuz has impacted energy costs at every point on the supply chain of the production of steel: from ore extraction, scrap movement, billet production, ocean and land freight. Fuel surcharges will continue to increase. The FOB price of manufactured steel will increase as the energy costs of production rise.

In recent weeks we have had cargo sail to NA ports with a +$200/MT spot freight increase adjustment from the purchase order. We have seen +$100/MT increases FOB mill basis (this is particularly important as tariffs increase with FOB price increases).

It is my belief that scrap and EAF furnaces will dominate the news in the coming months. EAF furnaces have recently been replacing blast furnaces for steel making. The premise was they generate a lot less carbon (which they do), however they also cost a whole lot less to run if you have two things at a cheap price: scrap and energy. Scrap is going to become a strategic, albeit national security level resource. We can see scrap export controls in the future from American governments (Canada, US, and Mexico alike) and the Euro zone. Take the time to talk to ChatGPT about scrap and EAF furnaces this week, you won't regret it.

DRI/HBI production out of the Gulf is closed due to damage and inability to ship out of the straits. Furthermore, the reported destruction of Iranian steel making facilities will impact supply and availability. So with Gulf production and Iranian production gone, we will see an impact globally. More scrap will be needed as less DRI/HBI is available, further pushing up prices to downstream products (longs first, then flats, then pipe and tube).

The price doesn't matter anymore, supply does.

Policy

Admittedly I am not an expert on CBAM or the European steel market. However, from conversations with partner mills at the tube and wire show in Germany this past April that sell to European markets, I deduce the following.

The quota system for the Euro zone has been recently changed drastically across many categories (much like we have seen happen in Canada). Also the CO2/MT rules and applications are very hard to understand. Most steel mills and traders are conservatively assuming they will be reaching the maximum carbon tax on imported tons, which inevitably generates a quote that is high and no longer competitive versus domestic European steel mills. (I even read Canadian steel mills, due to their low CO2 emissions per ton, could ship and land in the Euro zone at competitive prices. Truly a new world order.)

I mention CBAM because a lot of people in Canada talk about free trade (FT) and non-free trade nations (NFT). Both have their own tariff rate quota tables in Canada. Basically, all European nations and a select few Asian nations are free trade, and the rest of the world is non-free trade. With the new CBAM rules on carbon and reduced quotas in the Euro zone, I am going to go out on a limb and assume European steel mills are busy now. And they probably don't want to try to export steel and compete with non-free trade nations.

So the idea of diversifying import sources to free trade nations for the Canadian market was a fallacy. After CBAM, it is a fantasy. What happens in Brussels impacts what happens in Brampton.

CUSMA negotiations are set to re-commence, probably. I know Canadian tube mills continue to export to the USA today, with the support of globally competitive C$ FOB coil prices from Algoma and Dofasco. However, if something does change where Canadian steel can get to the US with less tariff, this will be a price catalyst for Canadian steel mills and reduce availability in Canada.

Chinese steel export controls quietly and slowly have been changing global supply: YoY Chinese steel production has decreased by 12%. (That's a lot of tons. Like a lot, a lot.) Also, something to plan for, something I hope doesn't happen: a potential Chinese encroachment in Taiwan. I could write a whole report on this potential event, and I will only mention it because in today's world anything is possible. At Intermetalink we are planning for more big geopolitical ruptures to happen before the end of the year, and I think any company with complex supply chains needs to do the same.

Regional markets (USA / Canada)

OK, here comes the tea. In Canada, the old pre-tariff steel inventories are running out. The price shock is real. Those that have had the privilege to avoid it till now will face the music in Q2.

Pipe for example in Eastern Canada was C$60-65/CWT. New import orders are C$120-125/CWT. A 100% increase in 6 months, or 20% per month. If you are not with the pace car, it's going to hurt to catch up.

In our US markets, we have seen a marked increase in activity since the Iran conflict started, driven by data centers, OCTG pipe demand, and Asian competitor mills kicking out lead times to September sailings.

Being partnered with Jazeera Steel in Oman (just outside the Strait of Hormuz) has put us in a unique position to supply our key US customers. We are in a similar situation in Canada. We have seen letters describing potential supply issues in late Q2. We expect to supply our customers with the steel, service, and transparency they have relied on since 1984.

Charts

Coaking Coal has room to run higher as we have seen in the past, a main RM to steel production.

Iron ore has increased as predicted 3 months ago, again still a lot of room to move on further geopolitics.

Scrap prices is going to be key to watch in the coming months. Don’t let the pattern here fool you.

US HRC, story of the year so far. Tariffs against Mexico and Canada have pushed a eco system for American mills.

HRC Turkey, forced to move on demand and costs (energy), expect higher as scrap becomes scarce.

USDCAD. Loonie is strong right now, it can weaken quickly. More US stock market volatility will weaken the loonie. Also with energy so expensive the loonie cannot get stronger. I would book in CAD in the coming months if you are a Canadian customer.

WTI Crude.

In my view the conflict will continue and worsen in the coming weeks.