January 5, 2022
Steel Facts: Did You Know?
Understanding the steel market has its fair share of challenges. Some common questions you might be asking yourself include:
What is the price of steel? Why are leads times so extended? What makes up a stainless steel surcharge?
We are here to help. Bookmark this page for all you need to know about the metal market. Check back regularly for updates as we will continually expand the knowledge on this page.
What is Hot Roll Coil Steel?
HRC (hot roll coil) is the principal finished steel form in the global steel industry. Pricing of HRC requires accurate and timely spot pricing and analysis. Many factors, ranging from the cost of the raw material to global trade agreements, ultimately impact pricing of the carbon steel product you purchase.
Raw Material: Steel begins in the raw state of iron ore, scrap, coking coal, and natural gas. The price of these resources is influenced by the producing countries and traded on exchanges.
Supply/Demand Dynamics: Macro-economic factors can play a large role. Take the U.S. administration imposing a 25% tariff on steel in early 2018 via Section 232, as an example.
Immediately, the U.S. experienced a rise in the pricing of HRC. Throughout much of 2018, on a non-tariff adjusted basis, U.S. steel prices traded at a wider premium relative to European and Chinese steel prices. When adding in applicable tariffs, however, the spreads appeared to have been more in line with historical norms.
Mill Treatments: HRC endures various treatments at the steel mill depending on the end-use of the product. Each treatment adds a different level of cost.
Scrap vs. Iron Ore
When it comes to the production of new steel, iron and steel scrap is a vital raw material. Therefore, the availability of scrap is important to ensure the timely and efficient production of steel.
Mills will use one of two methods when producing steel: Electric Arc Furnace (EAF) or BAF (blast arc furnace). EAF uses busheling scrap as its primary ingredient, as opposed to iron ore used by BAFs. The melting of scrap requires much less energy than the production of iron and steel products from iron ore. Therefore, as the push to go green calls for more energy efficiency across the entire supply chain, EAF has become a preferred method for many purchasing steel.
What Makes Up Stainless Steel Surcharges?
Surcharges are charges that are added to the base price per pound of an alloy and they typically vary based on the producing mill. For stainless steel, the two that are most closely tracked are 304 and 316.
Here is a quick breakdown of what comprises these surcharges:
For instance, nickel content is the alloy that is tracked most closely for stainless steel, which represents approximately 45-60% of the total cost of the stainless steel surcharge. It is prevalent in both stainless steel 304 (8%) and stainless steel 316 (10%).
Supply/demand fundamentals related to nickel can impact the price of the surcharge, either directly or indirectly. For example, electric vehicle (EV) batteries are produced using nickel sulfate. As demand for EVs goes up, so too does demand for nickel.
How is Aluminum Priced?
The price of aluminum is determined by more than simply the cost of the raw material. Three critical factors influence the price of aluminum.
Ingot: This is metal in its most raw form that will eventually be cast into a shape suitable for further processing.
The Premium: Consider this the logistical surcharge that is applied to deliver metal from warehouses to the mills where they will be processed.
For the U.S., this is S&P Global Platts Midwest Premium. It is a regional differential to the global price of aluminum. It is impacted by the regional cost of logistics, and supply and demand conditions in the U.S.
Conversion Actions: Once at the mill, the raw material is turned into a usable product. A cost to produce the final product is applied, which varies based on the specifics of the item produced.
Which Factors Influence Metal Lead Times?
As mill lead times continue to creep up for all metals, let’s look at the primary factors that typically influence how long it takes to acquire material from the mills:
Raw Material Availability: A shortage of key materials, such as aluminum ingot or scrap, limits the ability to produce metal.
Market Demand: One of the primary reasons that lead times have increased is the rising demand amid a shortage of supply.
Mill Capacity: This can be impacted by such factors as labor shortages, equipment issues, or health concerns, such as COVID-19, forcing shut-downs.
What is Capacity Utilization?
Steel mill capacity utilization refers to the production capabilities that are being utilized. Rates in the range of 80-85% are considered good. Some would classify this as the sweet spot for steel mills as it is close enough to full capacity, but with room to increase should demand levels ramp up.
The COVID-19 pandemic is a good example of how capacity utilization rates impact the market. In March-April 2020, steel mills anticipated a drop in demand and promptly took utilization rates down to around 50%.
However, market demand came back online faster than anticipated. Steel mills were not able to ramp-up production at a rate to match this demand, forcing many into catch-up mode. Subsequently, this contributed to higher prices.
