• Jun 24, 2022

Kelly Huntsman

A glance at what's happening in the market that impacts our industry and your business. Steel Costs remain volatile due to the outbreak of the war in Ukraine and other macro-economic factors. In this Market Update, we highlight some of the key factors impacting today’s steel prices and what to watch in the future.  

WHAT TO KNOW, IN SUMMARY

The outlook for steel prices and supply & demand for 2022 and 2023 is highly uncertain. The expectation of a continued and stable recovery from the pandemic has been shaken by the war in Ukraine, rising inflation, supply chain challenges and geopolitical instability. The geopolitical situation surrounding Ukraine poses significant long-term implications for the global steel industry. Among them are a possible readjustment in global trade flows, a shift in energy trade and its impact on energy transitions, and continued reconfiguration of global supply chains.

WHAT'S HAPPENING NOW

 

Imported Steel

Domestic buyers placed orders for large quantities of imports in January and February. Import costs were favorable to domestic costs, but after the war in Ukraine broke out on February 24, import orders decreased significantly.  Therefore, we expect to see lower import volume arriving in the summer and fall of 2022.

Steel Production

• Mill lead times decreased in April and May and have returned to normal levels.  Further decreases to lead times are not expected.
• Tons produced have declined in the past 3 weeks and remain below 2021 levels.
• Cold Rolled steel costs are likely to remain around $400-$500/ton higher than Hot Rolled steel. This is much higher than the historical average of $200.  Labor costs and limited Cold-Rolled capacity are driving this trend.
• Supply of iron ore is extremely volatile as Ukraine is the sixth largest global supplier.

Geopolitical Tension

The war in Ukraine has resulted in cost increases for the raw materials used in steel production.  Supply is tight for raw materials such as iron ore, scrap metal, coke, aluminum and zinc. China has made the decision to de-carbonize its steel production.  The timing is uncertain, but there will be additional costs.  A large percentage of China’s steel mills are specifically designed to export to the international market, and they can have a significant impact on global supply.

WHAT WE'RE WATCHING

The global labor shortage is expected to challenge production and delivery costs for steel mills and fabricators throughout 2022 and 2023. The mills have also increased their offerings of spot purchases at discount prices in May.  Historically, rapid changes in steel mill costs are often followed by a market correction.  The market has a history of overreacting to changes in the supply and demand dynamics that drive steel costs, so price corrections are common, particularly in the US. Spot prices for Galvalume have not decreased as much as other steel categories.  Galvalume costs tend to be more volatile due to the smaller number of buyers and sellers in the market.

Steel Demand

Demand for the four largest consumers of steel remains strong.  Demand for new construction remains strong despite an increase in interest rates.  Builders report that their largest concern is the lack of qualified labor. Demand for automobiles is strong, but production levels are volatile due to the chip shortage.  The quantity of chips produced has been very fluid and nearly impossible to forecast over the past two years. Demand from oil producers is increasing.  Rig counts have been on an upward trend and are now within 7% of pre-covid levels. Demand for appliances remains strong but is likely to decline as consumers are concerned about inflation and interest rates.

Tariff Rate Quota

The TRQ for The UK went into effect on May 31. Five-hundred thousand tons imported from the UK will enter the US tariff-free, but all additional tons will be subject to a 25% tariff. The goal is to ensure strong domestic capacity utilization.  Britain is a relatively small supplier of steel to the United States. The 500,000-ton quota for finished steel exceeds average UK shipments to the United States in 2018 and 2019 and is considerably smaller than the EU quota of 4.3 million tons and Japan's quota of 1.25 million tons. The UK tariffs will also expire in 1 year.

Steel Coating Materials

Roof and wall panels are coated with a mixture of zinc and aluminum to protect against moisture and prevent rusting. Aluminum costs reached an all-time high in March 2022. They decreased significantly in April and May, but remain approximately 30% higher than historical levels. The global deficit in aluminum is estimated at 700,000 metric tons. Zinc costs reached an all-time high at the end of April 2022.  Zinc costs are approximately 22% higher than last year and are expected to remain at the current levels or increase slightly through Q3 and Q4 of 2022. Paint is in short supply because a main ingredient used in paint production is also used for batteries that power electric vehicles.  The demand for electric vehicles has increased drastically, and it is likely to remain elevated through 2024.  Paint companies are having difficulty securing raw materials, and many suppliers are on allocation for four critical ingredients used to produce primer.

Alternative Substrate

Some suppliers offer AZ35 rather than AZ50 grade Galvalume.  However, AZ35 does not meet the code requirements for metal roofing, and it does not meet the definition of Galvalume.  Quality metal roof paint coatings are not designed to be applied to AZ35.  AZ35 is significantly thinner than AZ50 and has no corrosion warranty.  Using AZ35 substrate leaves the installers and manufacturers vulnerable to litigation when roofs leak and rust. 

FREIGHT COSTS

Freight disruption continues to delay deliveries and lead times. Trucking costs are at an all-time high due to a combination of inflation, driver shortages, and market demand. Overall freight rates excluding diesel fuel are up 34% from 2020 and 15% from 2021. In addition, the recent diesel volatility and the uptick in fuel prices have put extreme pressure on the transportation industry, causing prices to surge since March 2022. The current national average for diesel fuel is up 53% from January 2022, resulting in the highest fuel cost ever across the US. Freight demand remains strong across the US and will add further pricing pressure going into Q3 & Q4 of 2022.   Our Market Updates are brought to you by Cornerstone Building Brands subject matter experts and are curated for the purpose of creating awareness of economic factors that may potentially impact pricing, supply and demand affecting our customers. Any forward-looking statements are based on reasonable assumptions; these statements are not guarantees and undue reliance should not be placed on them. All views or opinions herein are solely those of the author(s) as of the date of this communication and are not to be relied upon as authoritative.  Nothing in this communication should be considered to constitute investment, legal, accounting, or tax advice or other advice of any kind.