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Q&A: Phillip Price interview with Fastmarkets

The Board Report Founder Phillip Price spoke with Fastmarkets regarding our take on steel futures markets as a result of the unprecedented COVID-19 crisis:

Fastmarkets: I know you work closely with futures markets and I think the futures market has become something people are looking at more because of all the uncertainties. How do you think the US HRC futures market has reflected the steel market in the US?

Phillip: US steel futures markets have reacted more promptly to the rapid change in sentiment caused by the COVID-19 pandemic than the domestic spot market, which is natural – it takes time for cooling demand to feedback through to lower mill offer prices (which we are starting to see now). And so it’s unsurprising the front end of the curve continues to present a fairly severe Backwardation. However, it also makes sense that the balance of the curve has pushed into a strong Contango – well above the cost of carry – as the paper market anticipates the recovery from this crisis and the resulting improvement in demand. As time elapses, we would expect to see this Contango curve soften more in line with the Cost of Carry (storage and finance costs) and later shift back towards a flat shape or Backwardation as demand improves and normal market conditions return.

Fastmarkets: How do you think the COVID-19 pandemic will hurt demand this year and even further?

Phillip: Without an effective and widespread treatment or vaccine, the most successful means we have of controlling the spread of the virus is social distancing and what has come to be termed as Lockdown – Almost Quarantine with all but essential movement curtailed for the vast majority of people. Although governments have endeavoured to maintain base levels of economic activity, this has meant closed building sites and factories in the worst affected areas and consumer demand for capital goods has collapsed. It’s tough to sell cars, white goods or indeed new condominiums when people aren’t allowed outside their homes. This demand constriction is likely to last far longer than the pandemic. Already in Europe we have seen a terrifying spike in job losses and business closures. Demand has spiralled and we are seeing numerous closures of steel plants unable to secure new orders. And the US jobless rate has risen by record levels as well. All this will, of course, impact consumption and limit economic activity in the medium term, compounded by what looks to be the onset of a recession that has been quietly growing and awaiting its cue for some time.

Fastmarkets: Do you think steelmaking capacity cuts will be enough to help with what mills may lose on the demand side? And why do you think that way?

Phillip: This demand shock to the system is pretty much unprecedented, in that the supply chain has seized and the normal workings of the supply and demand cycle for commodities have frozen at an incredibly rapid pace. A large proportion of the price collapses we have seen in paper markets have so far been driven by sentiment, although spot prices are now falling fast as well. Now that capacity is being rapidly limited, it’s tough to see whether this or the collapse in demand will have a greater medium-term impact on prices. Right now, for example, deep sea prices for obsolete scrap prices are falling extremely quickly and seem set to drop below $200/mt. But export processors and accumulators have slashed their gate prices even more rapidly, and supply is dwindling. As demand for finished steel returns to the market, this raw materials supply will have to be re-incentivized by an improvement in prices.

Fastmarkets: What is your forecast floor for US HRC pricing? And when do you think the market will reach that level?

Phillip: Floor and ceiling forecasts on spot pricing are almost impossible to get right and there are now so many factors at play predicting where prices will end up is even more challenging. As long as demand is so constrained and steel mills can produce without falling into the red, spot prices will continue to fall. In the US, this trend will almost certainly be lead by mini-mills and the key protagonist, in my view, will therefore be scrap, pig iron and HBI prices. Based on this factor and our expectation that capacity curtailments will likely continue due to the spread of the virus in the USA, I would anticipate a floor in the region of $425/t to $475/t for hot rolled prices. I would expect that floor to be reached in the next 4-6 weeks before capacity cuts start to provide a more supportive crutch. But, at the moment, we are reforming our market view on an almost minute-by-minute basis and I expect that view to change depending on a variety of fluid factors.

Fastmarkets: What are the other market and industry changes we are likely to see as a result of the COVID-19 outbreak?

Phillip: It seems increasingly clear that the Coronavirus crisis has opened the door for the next stage in the credit cycle and a recessionary environment, which will almost certainly limit consumption in the months and years ahead. With the right measures from the steel industry, such as the closure of inefficient steelmaking capacity, this doesn’t necessarily spell a recession in spot prices. But, considering policy makers seem likely to continue supporting higher cost and inflexible steel producers in the US, it seems likely there will remain a ceiling on domestic market prices for some time. In the international market, we expect to see an increase in the number of trade disputes as reduced demand for steel takes hold. Across the industry, we expect to see the use of steel derivatives continue accelerating and for these markets to play an increasingly dominant role in merchant steel trade.

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Phillip is the Founder of The Board Report, Pool and Price Consult – companies which specialize in developing liquidity in ferrous futures markets and delivering effective solutions for companies in the steel industry and the financial services sector.

Please reach out to us if you would like more information on any of these companies or their services.

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