Similar to lines first spoken in the “The Wizard of Oz,” this column’s title invokes fear and surprise of today’s steel prices and what they may be in the future. 

Steel manufacturing has been a key and especially important industrial activity in the United States since the late 1850s. In this column, we will trace the history of U.S. steel making and explain why the industry has changed in the last two years, why we have the highest price ever for steel, and what pressures may impact steel prices in the future.  

We will focus on hot rolled coils (HRC, also referred to as hot rolled band), as the production of HRC represents more than 75 percent of the steel production in this country, and is the base raw material for welded steel pipe and many other products. 

From 1875 to 1920, the production of steel in the United States grew from 380,000 tons to 60,000,000 tons annually. The most common method of manufacturing at the time was open hearth, a method that through the combination of coal or coke with pig iron, limestone and other elements results in a chemical reaction that, over time, cooks the impurities out and the liquified steel is poured into ingots. The ingots are then reheated and rolled into slabs and eventually into HRC.  

The process of open-hearth steel making is quite polluting, and it also produces slag and other waste that is often considered hazardous. One-sixth of all steel in the world is still made by the open-hearth methodology. 

The next decades witnessed the advent of the basic oxygen furnace, although similar to the open hearth used oxygen as the fuel. Steel made in a basic oxygen furnace was of better quality and purer, leading to higher yield and tensile strengths. An offshoot of this technology was the blast furnace. All these methods use processed iron ore as the metallic charge, resulting in what is considered virgin steel — steel that is manufactured for its initial use as compared to steel manufacturing processes that rely upon steel scrap for the metallic charge.  

Companies such as Bethlehem Steel, US Steel, Jones-Laughlin, Inland Steel, Armco, National Steel, Wheeling-Pittsburgh, Lykes-Youngstown and Republic Steel built large steel-making facilities located substantially in Pennsylvania, Indiana, Michigan, Ohio, Kentucky and Illinois. Some of these steel mills are now more than 100 years old, while many are more than 60 years old. Looking at these company names, the only entity that is still viable is US Steel. Most of the other mills have had numerous owners before permanently closing. More on the ownership of the surviving blast furnaces (integrated mills) later. 

Electric arc furnace (EAF) steel production was invented in the late 1880s, but the first advent of this technology was limited to small batches. An EAF uses a refractory-lined vessel with a removable roof. The roof is removed to fill the vessel with recycled steel scrap metallics and replaced. Then, three electrodes are inserted through the roof so that when an electrical charge is applied to the electrodes, an arc is formed between them. The heat caused by the arc melts and liquifies the scrap.  

An EAF may cost as little as one-third of the cost to build a blast furnace and, unlike the virgin steel furnaces, can be located anywhere there is enough scrap generated or where scrap can be easily transported to feed it. Of course, a reliable electricity source also is required. Due to the ability to be located near a scrap source and also near steel users, EAFs were given the nomenclature of being a “mini-mill,” with 75 percent to 90 percent of an EAF’s metallic charge being steel scrap. 

The most recognizable EAF-based steel manufacturer in the United States is Nucor, which built its first EAF mill in 1969, followed by rapid expansion with its third mini-mill being opened in 1975. Initially, EAFs were considered to have limits as the scrap source often left the steel dirtier than integrated mill steel and, therefore, qualified for fewer uses. However, Nucor was not to be deterred and was able to find ways to refine and clean the liquid steel so it could be used for almost all applications.  

Nucor, the largest overall steel manufacturer in the United States, was also the international leader in developing continuous casting, substantially lowered the man-hours per ton (now at 0.5 man-hours per ton) and drove down costs.  

Former Nucor executives opened new EAF ventures, such as Steel Dynamics and Big River. With the permanent closing of some of the integrated mills, more than 50 percent of the U.S. HRC was manufactured in EAF mills. EAF mill economics have such substantial advantages over an integrated mill it is unlikely that a new integrated mill will ever be built in the United States.  

Currently, there is 27.55 million tons of EAF HRC capacity and 43.85 million tons of blast furnace capacity. Planned EAF construction would increase EAF HRC capacity of more than 12 million tons, bringing the total to just under 40 million tons. There are 13.85 million tons of blast furnace capacity labeled as closed; it is likely that this tonnage will never come back online, leaving blast furnace capacity at 30 million tons. 

Interestingly, US Steel resisted joining the flight to EAF steel making for almost four decades until it purchased a 49 percent interest in Big River in late 2019. It eventually bought the balance of the company in early 2021. US Steel recently constructed an EAF mill in Fairfield, Ala., and announced a 3-million-ton EAF at a location yet to be determined. In addition, Big River is building a 1.65 million EAF mill in Brownsville, Texas. 

HRC in the Plumbing, Heating and PVF Industry 

HRC is the raw material for welded carbon steel pipe. In fact, HRC represents approximately 80 percent of the cost of manufacturing steel pipe.  

It is converted into cold rolled steel (CRS) and used to form water heater tanks as well as the exterior of water heaters, the exterior casement of air-conditioning compressors and air handlers. 

And HRC is used to make different kinds of pipe hangers. 

HRC Pricing 

Beginning in mid-December 2021, domestic HRC prices began to decrease. This is a result of less supply-demand imbalance. Steel service centers had rebuilt their inventories, which substantially impacted the imbalance. Additionally, buyers became price decline sensitive further limiting the volume they were willing to purchase.  

As a result, domestic HRC deliveries that had been in excess of 12 weeks for most of 2021 are now in the more normal range of five to six weeks. As of mid-January, the decline approached $400 per ton. 

HRC prices in the European Union have decreased from $1,360 per metric ton in August to around $1,000 per metric ton in December. World HRC prices, excluding domestic, EU and China, have fallen from $970/metric ton to $800/metric ton over the same time. 

Considering this information, it seems reasonable to expect that domestic HRC prices will continue to decline in the near future. How much or how long it will take to reach the bottom is anyone’s guess, considering the shift in ownership. 

So how do today’s prices compare historically? 

The chart below shows the average price per metric ton of HRC over the last seven years based on information from SteelBencmarker’s twice a month report: 

2015:         $567

2016:         $519

2017:         $615

2018:         $821

2019:         $599

2020:         $713

Jan-June 2021: $1,448

July-Nov. 2021: $2,034 

Matters Impacting Steel Prices

Listed are a number of factors that impact the current steel price levels. 

1. Trade laws and duties. The United States has a set of trade laws to prevent unfair trade; many countries have similar laws in place to protect their domestic industries. We often hear that imported steel and, in particular, unfairly traded steel is destroying the U.S. steel industry and the goal of these trade laws is to protect the US steel industry and create fairly traded steel. These include: 

• Anti-dumping duties (AD) penalize producers for product being sold to the United States at a free on board (FOB) shipping point price lower than their cost or what that same or similar product sells for in the foreign country’s domestic market. If the country of origin does not have a market economy (i.e., China), the law allows the U.S. Department of Commerce to find a market economy with a similar cost structure to develop costs and market information.  

The AD duty rates are analyzed and reset yearly. Uniquely in the World, the United States has importers that make a deposit estimate of the AD duties and then retroactively sets the AD rate upon data review. This is different than any other countries, with a higher or lower actual rate with the resulting financial settlement. As the setting of the final rate is retroactive, there is additional risk to the importer, adding a layer of obedience to the process.  

• Countervailing duties (CVD) are tariffs on imported goods that are imposed to offset subsidies given by the exporting country’s governments. Like AD, CVD is calculated retroactively. The steel industry must file suit against the exporters in a particular country to begin the process of a country having an AD or CVD.  

Following the filing of the lawsuit, there is a protracted study and analysis by the U.S. Department of Commerce to confirm if there is dumping or countervailing duties. The U.S. International Trade Commission has the final say that a U.S. industry has or is likely to be injured by unfairly traded steel. The steel industry has more than 50 percent of the current total AD/CVD orders. 

• Section 232 duties are duties that the U.S. president can impose if a domestic industry’s existence, which is critical to national security, is threatened by imports. The first president to impose Section 232 steel tariffs was President Donald Trump in 2017, although other presidents previously considered but failed to impose 232 tariffs.  

The former president ordered 25-percent tariffs on steel products and 10 percent on aluminum products being imported into the United States. The Section 232 tariffs are currently in effect except for Mexico, Canada and Korea; however, President Joe Biden has agreed, in principle, to enter into an agreement with the European Union to eliminate the Section 232 tariffs in exchange for a quota or other trade matters. The amount of HRC steel being imported into the country has declined since Section 232 tariffs were implemented.  

2. Supply and demand under COVID-19. When the COVID-19 pandemic began in March-April 2020, steel mills reduced steel-making activities and the steel service center industry lowered its inventory levels to reduce their inventory value risk. Steel prices, similar to many other commodities, fell by 20 percent in the period of January to August 2020, an amount that would be reflected in financial losses to service centers’ financials and difficult to digest. 

As businesses returned to work in the third quarter of 2020, steel demand increased and with steel service center inventories reduced, the steel mills were inundated with orders not only for the steel needed to fulfill immediate needs, but also orders to allow the steel service centers to rebuild their inventories.  

The steel mills geared up, but demand exceeded supply and delivery schedules stretched out to as long as five to six months. This scenario allowed the mills to increase prices dramatically and, as a result, the mills became very disciplined about holding prices firm. Within a two-week period in late November into early December, HRC prices increased more than 20 percent — an increase that set the stage for steel prices almost doubling from early December 2020 to the present. 

3. Industry consolidations. In 2020, Cleveland Cliffs, traditionally a mining company of iron ore and related metallics processing, acquired both AK Steel and ArcelorMittal USA, as well as buying Nippon Steel’s interest in an Alabama-based rolling mill that ArcelorMittal and Nippon owned as a joint venture. As a result, Cleveland Cliffs became the largest flat-rolled steel producer in North America. It has an integrated manufacturing capacity of 26.55 million tons, of which 18.35 million tons is from active facilities.  

Current production from these plants approximates 9 to 10 million tons per year. The consolidation of AK Steel and ArcelorMittal into Cleveland Cliffs leaves Cleveland Cliffs and US Steel as the only integrated blast furnace steel producers in the United States.  

EAF HRC steel production consolidation over the last decade has left only six EAF HRC steel manufacturers. Nucor is the largest, with Steel Dynamics the second largest and US Steel finishing up the top three.  

Please note that EAF steel making also is used to manufacturer a number of other steel products that this column does not focus on, such as reinforcing bar, round bar, merchant steel shapes, beams and round billet, to name a few.  

What May Impact the Future Price of HRC 

Historically, U.S.-manufactured steel has been the highest-priced steel in the world. As of the writing of this column, U.S, HRC prices are 82 percent higher than HRC in the European Union; 123 percent higher than the world HRC price (excluding China and the EU); and 222 percent higher than HRC in China.  

There is no Chinese HRC coming to the United States because the in-place Chinese AD and CVD duties collectively exceeds 150 percent with no assurance of the final actual duties that must be paid. China also is subject to Section 301 trade duties, not explained herein as the application of 301 is not often used for steel products; for now, it only impacts product from China.  

• Imbalance of steel demand across international economies. If international economies slow and prices in other producing countries decline, steel producers from other countries may ship larger quantities of HRC into the United States and U.S. steel manufacturers might lower prices to prevent loss of market share. 

• The building of recently added and planned new domestic steel-making capacity. The addition of the U.S. steelmaking capacity in tons listed below, which are all EAFs, will increase supply. For the market to stay in balance, existing mills will have to reduce their shipments. The question is will the mills accept to reduce the quantity manufactured to support a higher price level. 

— US Steel (Alabama or Arkansas): 3 million

— Big River Steel (Brownsville, Texas): 1.65 million

— Nucor (Ohio, Pennsylvania or W. Virginia): 3 million

— Nucor (Gallatin): 1.4 million

— North Star BlueScope: 1 million

— JSW (Ohio): 1.5 million

— Steel Dynamics (Sinton, Texas): 3 million 

• Unwinding of the Section 232 tariff. After the United States has negotiated Section 232 relief with the EU, other countries will come forward seeking relief. The Section 232 tariffs have political power; for example, if Taiwan, a key enemy of China, comes to the United States and asks for 232 relief, how do we turn them down? Or Oman, where we have key military bases in the Middle East, asks for relief — how do we turn them down?  

Section 232 also has some political challenges as the advent of the tariff in 2017 has not been proven to deal with national security. There were 83,000 people in 2019 working at U.S. steel mills, while there are reportedly more than 6 million jobs associated with using steel to manufacture a product. With the U.S. steel-using industries paying so much more than their offshore competitors for steel, the 232 tariffs are actually creating a hardship on many companies.  

• Cleveland Cliffs scrap load. One of the challenges that any steel manufacturer has to deal with is the sourcing of its metallic charge. To mitigate this challenge, in 2007, Steel Dynamic purchased OmniSource; in 2008, Nucor purchased David J. Joseph Co.  

Interestingly, although steel scrap might provide 10 percent of the metallics for a blast furnace, Cleveland Cliffs, having its own iron ore deposits and not owning a scrap-based EAF, in October bought Ferrous Processing and Trading for $775 million. Perhaps the thinking of Cleveland Cliffs was that one way to help support HRC prices was to have an investment in a metal recycler. Under certain circumstances, it could increase scrap prices by increasing scrap demand via having a higher scrap charge into the blast furnace.  

• Industry consolidations. With US Steel and Cleveland Cliffs owning all of the HRC blast furnace facilities in the United States, it is natural that each participant can more accurately predict pricing. Please understand this is not suggesting there is any price collusion, rather it is a natural occurrence when the number of competitors declines to two companies within a business sector.  

• Decline in demand. A decrease in HRC consumption/demand may lead to lower prices as supply might exceed demand. As interest rates increase to slow inflation, demand also may decline. 

• International transit of HRC. Ocean freight rate moderation and ocean freight congestion detanglement will reduce the total cost of imported HRC, resulting in less demand for U.S.-manufactured HRC. 

In the short term, U.S.-manufactured HRC prices are expected to remain elevated. When or what causes the prices to decline is unknown; however, there are a number of possible toggles that might result in lower HRC prices.  

Gerald Merfish is past-president of the National Association of Steel Pipe Distributors. He recently retired from Merfish United where he served more than four decades as CEO of Merfish Pipe and chairman of Merfish United. He has now established Merfish Advisors where he shares his wisdom in coaching, mentoring and advising small-business entrepreneurs toward achieving success. Merfish can be contacted at gmerfish@outlook.com.