Views From the Trenches #29: Market Dynamics Point to Higher Prices

Research evidence excerpt

Views From the Trenches #29: Market Dynamics Point to Higher Prices

IdeaMFurther, the executive mentioned industry inventories seem tight with his customers

demanding more steel than he can provide. His level of inventory is less than two

months, compared with a more normal level of approximately three months. Low

inventories are a key reason prices continue to rise, and buyers have limited ability

to build safety stocks ahead of fall outages, or potential labor disruption as contract

negotiations approach.

Potential USW negotiations are an additional risk. In a normal environment, buyers

would build inventory ahead of potential labor disruption, but the current market

does not allow that because spot supply is scarce and contracted deliveries are

already delayed. Any labor-related disruption during the fall outage season would

further tighten an already constrained market.

Looking further out, the speaker expects 2027 and 2028 to be stronger years for

steel consumption as manufacturing activity broadens out and accelerates.

Importantly, he does not view expanding domestic capacity as a near-term bearish

risk because new lines typically take time to become meaningful suppliers.

...and contract negotiations are shifting in favor of the steel mills. Contract

negotiations into year-end are expected to be difficult. Buyers want more contract

coverage to protect their supply, while mills want less contract exposure, smaller

discounts, and more ability to participate in spot upside. The executive currently

buys roughly 50% contract and 50% spot, and would prefer to increase contract

coverage in the current environment. However, he believes mills hold the stronger

negotiating position because spot availability is scarce and inventories are low.