Commodities 2021: US HRC pricing enters 2021 at 12-year high; Q1 sentiment firm

Pittsburgh — US hot-rolled coil prices rallied in the final months of 2020, with domestic spot prices exceeding $1,000/st in the final week of December – marking the highest level in more than a decade – with market sources expecting prices to remain elevated in early 2021.

The uptick in prices comes as mills have struggled to keep up with demand after end-users restarted operations following pandemic-related shutdowns earlier in the year. At the same time, rising raw material prices are also placing upward pressure on pricing.

The daily Platts TSI US HRC index stood at $1,009.25/st as of Dec. 30, marking a 12-year high. The US HRC index has surged nearly $570/st since the end of July, marching closer to the all-time high of $1,075/st reached in 2008.

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Market sentiment firm

Sentiment was very firm in the US steel market heading into December, according to the monthly US steel sentiment survey by S&P Global Platts, with all participants expecting higher steel and raw material prices in coming weeks, and most expecting increased production and declining inventory levels.

In the survey of US producers, distributors, traders and end-customers, conducted in the run-up to December, the index for steel price development was at 86.8, indicating broad expectations of an increase (an index of 50 indicates stability).

The producer, trader, and end-user sectors were all equally most bullish, with the price development index among the three groups at 87.5, while raw material suppliers, brokers, and distributors were slightly less bullish at 83.33.

"Low supply, demand very strong, no imports to backstop like 2018," one trader said. "Prices have to keep rising."

Participants expected steel production to see an uptick as well, with the index including all groups at 69.7. Notably, end-users and mills were the most bullish at 87.5 and 75, respectively. The production change index for the trader group came in at 68.75, and 58.3 for raw material suppliers, brokers and distributors.

Even after a series of furnaces that were restarted in recent months, US raw steel capability utilization stood at 72.3%, the American Iron and Steel Institute reported Dec. 28, down 11.8% compared with the same week a year earlier.

All eyes on Jan. scrap buy

Sources cited the importance of the scrap price movement in January for flat-rolled products pricing. Some scrap market sources expected the increase in January primes grades pricing would be as high as up $100/lt from December, which would put further pressure on HRC prices that were already testing all-time highs.

A Midwest buyer expected a "notable push higher" in HRC prices with "still-limited availability" from domestic mills and "any substantial import steel seems months away," he said Dec. 30.

With the ongoing imbalance in supply and demand, average HRC lead times for domestic mills stood above a 9-week average for the seventh consecutive week, at 9.8 weeks on Dec. 30, according to Platts data.

Analyst expectations rise for 2021

KeyBanc Capital Markets in late December raised its pricing expectations for HRC, lifting its 2020 and 2021 US spot HRC pricing forecasts to $585/st (from $570/st) and to $710/st (from $625).

The fourth quarter of 2020 and Q1 2021 are expected to be the peak in terms of HRC supply tightness, with the expectation that lead times will normalize by the second half of 2021, KeyBanc analyst Phil Gibbs said in a report Dec. 21.

Near-term steel demand in the US has recovered faster than supply, notably in auto, causing some pull forward in Q4 demand as buyers attempt to fulfill delayed auto needs and hedge buy for customers ahead of future inflation, Gibbs said.

"These near-term (supply and demand) dynamics have elicited an epic rise/short squeeze in carbon sheet prices over the last three to four months," he said.

Additionally, materially higher prime scrap prices driven by new US mills, a global focus on ESG (environmental, social, governance) investing, and a potential reentry of China in the seaborne scrap market in 2021, should also support higher pricing in early 2021, Gibbs added.

"We materially increase our 2020-2021 US HRC pricing expectations to reflect this reality, with the bulk of the spot pricing strength in 4Q20-1Q21, suggesting HRC pricing momentum will enter 2021 like a lion and exit like a lamb as the US sheet market absorbs new supply-side source," he said.