• Susan Murphy

OCTG: Raw Materials ‘Steel’ the Show in 1H21



The upset in the raw materials market in 2021 is ‘steeling’ the show and putting the oil patch through the mill once again. Seems like the mantra for the industry over the past decade could be, “if it’s not one thing, it’s another.” In the current state of play though, it’s not one thing, it’s everything. Every steel raw material (ferrous and non-ferrous) is trading above or near all-time highs.


To query sentiment for OCTG feedstock prices and prognosis we issued a “60-second survey” last week, hoping for a consensus. Before revealing the results of our poll in our May market intel we attempted an abbreviated walk down memory lane to review how we arrived at this tale of two crises: when metal met Covid.


Last year’s historic pandemic roiled the steel and commodity markets and reverberated throughout the steel supply chain. Later in the year as many consumers found themselves flush with disposable income from extended statewide stay-at-home mandates, some end markets such as automobiles were beneficiaries of a V-shaped recovery. The early 2020 lockdowns prompted a spike in consumer electronic sales for which computer chips are a necessary component. Turns out these same electronic chips are used for new automobiles. The problem for carmakers is they can’t compete against the computer market that lays claim to the lion’s share of the chips. This has forced automakers to reduce and/or shutdown production and when new cars aren’t available for sale old cars aren’t available to recycle for scrap steel (the #1 source of post-consumer/non-prime scrap). Plus, with steel mills cutting automotive production, the same is true for this main source of prime/prompt scrap. Thus, the free flow of scrap materials from all sources has been halted creating record shortfalls. Meanwhile, HRC, now a hot mess, has experienced a similar fate born out of somewhat different set of circumstances. The pandemic and subsequent dearth of demand caused steel mills to curb production, bringing capacity utilization to multi-year lows and depleting stocks of raw materials. As the country began to reopen it triggered a rebound in HRC-intensive industries such as automotive and construction and HRC was suddenly in short supply. Steelmakers have been playing catchup ever since and doing so under Covid-related constraints.


For many, much of this review will conjure 2008. Short story: in 2008 domestic steel prices increased in 1H08 due to a demand-driven rally before the credit crisis derailed demand and sent the markets plunging later that year. In 2020, Covid-19 took the wind out of any potential ‘sales’ for 1H20 but unprecedented demand has since turned the market upside down creating a supply-driven rally that has legs. Further, steelmakers have done all they can to mitigate a repeat of 2008/2009. Caution rules the day—speculation is not in play. And, in this instance, trade protections will prevent China (and discourage others) from dumping tons of excess OCTG into the market like they did in late 2008.


The results of our raw materials survey can be found in our May market intel. We view this situation as upending pricing relative to historical averages—in the case of HRC for an extended period and much longer for scrap. On the scrap side, there’s a structural change ahead led by the new EAF mills. While they will generate more steel supply they will also be using (mostly) prime scrap as a feedstock, thus potentially keeping prices higher for the next one to three years. The new mills will also have to compete with scrap exports. While EAF feedstock requirements are a subject of debate, we discuss our price outlook based on our analysis in the May Report. HRC prices, on the other hand, will correct as orders are delivered, imports arrive, and new capacity comes online. However, we believe the new normal will average closer to the price we forecast in our May Report for at least the next year until the auto industry is back ‘in the chips’ and returns to full force.


So, as we’ve breached the limits of our space, just one question remains. After all this what’s next for the US, a “Brood X” cicada invasion?

NOTE: Our monthly blog posts offer a slice of the content we publish in The OCTG Situation Report® every month. To subscribe and/or request a complimentary copy of our Report for review please visit: https://www.octgsituationreport.com/subscribe

Photo SM Energy Courtesy ©Jim Blecha www.oilandgasstockphotography.com