Cautious Steelmakers Give Legs To Metal’s Rally As Buyers Roll

(Bloomberg) — The record rally in steel must continue as US manufacturers pledge not to get burned again by ramping up too quickly.

Prices for US hot rolled coil futures are up more than 80% in 2021, the best start to a year in records dating back to 2009 and overshadowing gains in other all major commodities. Prices reached a record high last week. Despite customer pleas for more metal, steelmakers that have paid high costs to shut down furnaces during the pandemic have yet to announce new plans to build capacity, aimed instead at generating record profits for shareholders.

The surge in steel, used in everything from cars to washing machines to toasters, is raising concerns that rising costs could jeopardize a fragile economic recovery as manufacturers grapple with material shortages and inflation gauges jump. Last month, tractor maker AGCO Corp. farmers are slowing down their purchases amid rising steel prices, while Siemens Gamesa Renewable Energy SA’s profit warning rippled through the shares of Europe’s largest wind turbine makers.

“The finance departments have a voice they didn’t have before, so the industry is now more driven for profit than production,” said Michelle Applebaum, an independent steel consultant who has covered the industry for 40 years. “It’s a real culture change.”

According to Bloomberg Intelligence analyst Andrew Cosgrove, US steel consumption is at a pace of about 104 million tons this year and about 108 million tons in 2022. With domestic steelmakers producing only about 87 million this year and 91 million next year, and the planned capacity coming online by the end of next year at about 4.6 million tons per year, customers will continue to compete for available metal.

To make matters even more difficult, rising demand across the world from China to Europe means that US buyers will also be competing for imports. Meanwhile, US tariffs on shipments from abroad are maintained, hurting affordability.

Cleveland Cliffs Inc. Chief Executive Officer Lourenco Goncalves told investors last quarter that he was not going to produce more tons as this will eventually lead to oversupply and a deterioration in prices.

“It’s value, it’s not volume,” he said.

Sure, not everyone sees the metal rising for the rest of the year. Demand for cars will not be as high as initially projected as the semiconductor problems have forced the industry to stockpile while it waits to make the vehicles, and the market has essentially recovered to pre-pandemic levels. question, according to Keybanc Capital Markets analyst Phil Gibbs.

“The imbalance between supply and demand is now marching towards equilibrium: This is the latest fever peak of the shortage,” Gibbs said. “Our view of the real demand is that we think you are in a situation of modest oversupply. The only reason we don’t see it in the price is that factories have fairly long backlogs that they clear up.”

US steelmakers told investors in second-quarter conference calls that backlogs are at an all-time high and that, as demand will remain high through 2021, they will return to record profits in the third quarter. That outlook further supports the outlook for a further rally in steel.

(Updates with record steel price, profit warnings in second and third paragraph)

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