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May 12, 2023

2023 could bring restocking of inventory, higher steel prices

If steel prices are supposed to continue their increase in 2023, the

If steel prices are supposed to continue their increase in 2023, the manufacturing sector is going to have to demonstrate greater demand for steel than what was shown at the close of 2022. Vladimir Zapletin / iStock / Getty Images Plus

Steel sheet prices have bottomed or soon will, according to most respondents to our latest Steel Market Update (SMU) surveys. We’ve also seen more people predicting higher prices in the months ahead.

On a basic level, that's because we’ve seen a modest increase in lead times—which are up by an average of 0.5 weeks recently. Hot-rolled coil (HRC) lead times, for example, had been slightly below four weeks on average; they’re now at 4.4 weeks (see Figure 1).

Lead times can be an important advance indicator of pricing moves. A 4.4-week lead time doesn't mean higher prices are a slam dunk, but the chances of prices increasing go up considerably if we start to see HRC lead times averaging five to six weeks.

Also, mills are less willing to negotiate lower prices than they had been in prior weeks. Recall that for several months, nearly all producers were willing to discount to bring in orders.

Longer lead times and fewer mills willing to cut deals comes after a round of $60/ton ($3/cwt) price increases announced by mills in the U.S. and Canada the week after Thanksgiving. Figure 2 provides a quick snapshot of price expectations before and after the price hike announcements. (Note: Plate mills were more willing to negotiate lower prices because Nucor, a leading plate producer, announced a $140/ton price decrease.)

Before sheet mills announced price increases, forecasts were divergent. About 60% of people thought prices would remain roughly where they were. That's not uncommon. Notable was that nearly 20% thought they would go above $700/ton while another roughly 20% predicted they would fall into the $500s/ton. That surprised me at the time because $500s/ton is getting close to breakeven for integrated mills, especially once you consider that contract prices are done at a discount to spot prices.

The $700s/ton crowd (30%) has since grown, and only about 12% of respondents think that prices in two months will be in the $500s per ton or lower. Also interesting is that some are predicting prices will be even higher than the aggressive target prices of $700/ton announced by certain mills. That result reads to me like they are expecting another round of price hikes and they believe those additional hikes will gain traction.

We’ve also seen a modest change in service center pricing, which indicates that higher prices at the mill level are having at least some impact downstream (see Figure 3). Namely, the number of service centers reporting that they are increasing prices (11%) has grown. Also, fewer (46%) are cutting prices.

We saw a similar trend in August and September following a round of mill price increases. Those ultimately fizzled though. Here's the point: One week does not make a trend. I’ll be keeping a close eye in the weeks ahead on whether service centers continue to show interest in increasing prices.

Remember, too, that sentiment can be a significant driver of prices in the short term. We’ve seen a big uptick in positive sentiment lately. Look at Figure 4.

When asked whether they were optimistic about their prospects in the first half of 2023, 73% were optimistic. It's not unusual to see optimism heading into the new year given that Q1 is typically busy. Companies restock ahead of construction season in the spring. Automotive activity ramps back up again following the holidays. Additionally, there are no longer concerns about year-end inventory taxes.

Still, I wasn't expecting to see people this optimistic with headlines about war in Europe, higher interest rates, and a potential recession. What explains it? Is it bullishness about infrastructure spending, provisions in the Inflation Reduction Act that will encourage the build-out of steel-intensive wind and solar power generation, or something else entirely? I’d be curious to know what your thoughts are.

What worries me a little is that we haven't seen much change in overall demand (see Figure 5). Most people (66%) continue to say that it's stable. Those saying it's declining (22%) still outnumber those who say that it's increasing (12%). If higher prices are going to stick, the steel industry is going to need to see demand improve.

Another factor that gives me pause amid all the bullishness around 2023 is how service centers and manufacturers are handling their inventories. I thought I might be able to say by now that 2021 was a restocking year, 2022 was a destocking year, and 2023 would bring a return of restocking. That might still prove to be the case. But it's not in the numbers yet. Most respondents to our surveys continue to report that they are maintaining inventory, and a significant number continue to slash stocks. Only a handful report that they are building inventories.

A robust manufacturing economy in 2023 hinges on whether and when we see a restocking cycle. If I had to pick one thing to watch in the weeks ahead—besides prices, lead times, mill negotiations, and sentiment—it would be buyer inventories.

Don't forget to register for the Tampa Steel Conference, Feb. 5-7. You can learn more and register here: www.tampasteelconference.com/registration.

We’ll have C-level executives from mills in the U.S., Canada, and Mexico, as well as leading experts on energy, trade policy, and geopolitics. It's the high season for tourism in Florida, so consider booking soon. Hotel rooms are already getting scarce.

If you like what you see above, consider subscribing to SMU. To do that, contact Lindsey Fox at [email protected].

Also, please participate in our market surveys, if you don't already. Contact Brett Linton at [email protected]. Don't just read the data. See your company's experience reflected in it!