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Recession fears, waning confidence make for uneasy summer in US metals market

  • Featuring
  • Christopher Davis
  • Commodity
  • Metals

Summertime is supposed to be when the living is easy. At least that's how the old song goes.

However, with recession concerns swirling, consumer confidence waning and demand softening, this summer has been anything but easy on the US metals complex.

At the same time, prices for a number of headline products – from hot-rolled steel to primary aluminum, ferrous scrap to pig iron – have been in a steady decline following a rapid runup in the early part of the year.

The upturn came just after domestic metals markets appeared to be stabilizing from record price highs in 2021. And the current downturn is yet another example of the continuing challenges of an uneven post-COVID economic recovery.

US hot-rolled coil, a bellwether of steel sector health, topped $1,500/st just three months ago. With summer now well under way, the US ex-works mill HRC assessment has fallen roughly 43% since then to $850/st – the lowest level since December 2020, according to Platts pricing data published by S&P Global Commodity Insights.

Graph: US hot-rolled coil

Key electric-arc furnace feedstock pig iron was assessed at $1,000/mt CIF New Orleans at the beginning of April. It's down 38% to $620/mt currently.

Graph: US pig iron

Scrap prices have reacted similarly, with the US Midwest shredded scrap index down by more than 26% from April, to $450/lt, and US Midwest No. 1 busheling now at $500/lt – a nearly 36% decline over the same period, according to Platts data.

Graph: US scrap prices

Graph: US busheling

The Platts Midwest aluminum transaction premium, the US benchmark, reached an all-time high in late March and early April of 40.1 cents/lb. It's down more than 29.7% to 28.2 cents/lb, Platts data showed.

Graph: US Midwest aluminum premium

While Platts – an independent price reporting agency – has no vested interest in whether price assessments rise or fall, most market participants clearly do.

"Prices stink," was the way one US-based aluminum trader summed up things recently. "No one is short metal. July is a slow period. Europe is closed. Look at the stock market – it is down again."

Multiple factors at play

Just like when prices soared earlier this year, there are multiple factors driving the current downturn.

The market has mostly recovered from the impact Russia's invasion of Ukraine had on flows of essential raw materials, such as pig iron. The two countries accounted for roughly 62% of American pig iron imports in 2021. The war disrupted supply from the region, forcing steelmakers in the US – where about 70% of production is EAF based – to seek alternatives.

Now that the initial shock has worn off, and demand has softened, the frenzy of pig iron buying from Brazil and elsewhere has eased. Scrap prices, in turn, have declined too, as mill buying slows.

Year-on-year US raw steel production was down 6.1% in the week ending July 9, according to the American Iron and Steel Institute, as mills implement maintenance outages and auto producers take traditional summer shutdowns.

Two major US aluminum smelters have announced production cuts in recent weeks – one citing rising energy costs, the other operational challenges – but neither seems to have interrupted the slide in the US premium.

Consumer confidence in the US also continues to weaken, meaning end-users are ordering less metal for their own needs.

In late June, independent business research group, the Conference Board, said its Consumer Confidence Index had reached its lowest level since February 2021. Its Expectations Index – a measure of American consumers' near-term outlook on income, business and labor market conditions – was at its lowest since March 2013.

As US metal prices soared earlier this year, imports began to flow into the high-priced market. Import levels remain stubbornly high, shrinking domestic producers' market share.

Year-to-date US total and finished steel imports were up 18.4% and 40.8%, respectively, through May, when total steel imports totaled roughly 2.7 million st, AISI said, based on preliminary US Census Bureau Data. AISI estimated finished steel import market share at 25% in May and 24% over the first five months of 2022.

Overall US aluminum imports of P1020 material or greater purity were up 35.72% year on year to 837,202 mt through May, according to Census data.

Whether the import trend will continue is unclear. "When pricing domestically is in a freefall like this, it's really not a good idea," a domestic service center source told S&P Global about his perspective on placing an offshore order in the near term.

The uptick in imports comes as questions have arisen again regarding the status of US Section 232 import tariffs. The uncertainty of whether many imports of steel and aluminum will continue to be subjected to respective duties of 25% and 10% has only further depressed buying, as market participants not immediately in need of material delay rebuilding stocks.

The inertia has mills "acknowledging [the market] has further room to slide and not a hell of a whole lot to do to stop it," the service center source said.

From the sound of it, the US metals market might not have it easy anytime soon, let alone this summer.