What do refrigerators, air conditioning
units, and new cars have in common? They're all seeing prices spike as
manufacturers grapple with a worsening shortage of a key component: steel.
Since March 2020, steel prices are up a
staggering 215%. The benchmark price for hot-rolled steel hit another all-time
high last week, climbing to $1,825. Prior to the pandemic, it traded in the
$500 to $800 range.
What's going on? During the early months
of the 2020 shutdowns, many steel mills shut off production in fear that we
were headed into a deep recession—maybe even a depression. But that drop-off in
demand didn't last long for iron ore. Early in the pandemic, stuck at home
Americans rushed to spruce up their abodes. Soon, steel-heavy products like
grills and refrigerators were in high demand. That quick rebound caught steel
mills off-guard.
"What happened, which is similar to
lumber, demand during COVID-19 was stronger than first anticipated because of switches
in consumption patterns. Instead of paying for experiences and vacations, they
were buying a new lawn mower, buying a new car, or white goods like
appliances—which are steel intensive," Thorsten Schier, a metals expert at
Fastmarkets, tells Fortune.
As the U.S. begins to fully reopen, some
pandemic-spurred trends, like lumber and steel intensive do-it-yourself home
remodeling, are slowing down. That DIY pullback is, in part, helping to cause a
correction in the lumber market: Since peaking at $1,515 per thousand board
feet on May 28—which was 300% above its pre-pandemic price—the cash price of
lumber is down 49% to $770 as of Friday. That begs the question: Why isn't
steel seeing a similar correction?
Any pullback in household durables is
certainly felt by steelmakers. However, unlike wood products, steel is less
dependent on DIY or new home construction—which is also cooling down a bit from
its March peak this year. In fact, many industries that are steel heavy, like
oil and gas, are seeing their steel demand soar right now as the economy
reopens. Oil producers and refineries will only need more steel in the coming
months as Americans return to air travel and their daily commutes.
"I don't think we've hit the peak
for steel prices. Most people in the market see strength through the third
quarter, and some don't see it getting better on the buying side until 2022
sometime," Schier says. "It is just that supply is that tight. People
are scrambling for material."
Another factor: Consolidation. Two major
acquisitions last year by steelmaking titan Cleveland-Cliffs—AK Steel for $1.1
billion and U.S. steel mills from ArcelorMittal for $1.4 billion—has
essentially made the steel industry a duopoly. That firm grip by
Cleveland-Cliffs and United States Steel Corporation on the market, Schier
says, leaves them with little incentive to increase production. After all,
creating more supply would only mean their prices would fall.
The other wildcard at play are global
supply chains issues. In particular, the chip shortage which is hampering new
car production. Once the chip shortage is resolved, the automotive industry is
expected to ramp-up. More cars rolling off production lines, means more steel
demand.
Fastmarket's Schier was blunt with his
short-term steel assessment: "There doesn't appear to be any sign that it
is abating anytime soon."
Fortune.com