Menu icon

Rising Steel Prices Were Inevitable. How Long Will They Last?

By Michael Sullivan, Steve Katz (host)
Home / Perspectives / Rising Steel Prices Were Inevitable. How Long Will They Last?

Michael Sullivan, Vice President of the Metals and Mining Valuation Group at Hilco Valuation Services, elaborates on the historic factors leading up to the current meteoric rise in domestic steel prices, how mills are evolving, and why we are not likely to see a dramatic falloff in pricing for the foreseeable future.

Listen or View Transcript



Steve Katz: Hello again, and welcome to the Hilco Global Smarter Perspective podcast series. I’m your host, Steve Katz. Today, we’re speaking with Michael Sullivan, Vice President of the Metals and Mining Valuation Group at Hilco Valuation Services, about the continuing historic rise in domestic steel prices, the reasons behind this development, and where the market is likely to go from here.

Steve Katz: Before joining Hilco, Michael worked in the steel industry for 25 years, which always allows him to bring a wealth of knowledge to our discussions. Just as a little quick background, Hilco Valuation teams work in machinery, equipment, and enterprise evaluation for numerous companies in the metals and mining industry, and thoroughly understand the unique dynamics of price volatility on manufacturers, distributors, and fabricators. And Michael and his team leverage proprietary market trend data to assist their customers in ongoing assessment of how market forces drive recovery values.

Steve Katz: With that said welcome to the podcast, Michael.

Michael Sullivan: Good morning, Steve. Good to talk to you again.

Steve Katz: Yeah, well, it’s great to have you back and get your take to what’s been going on with steel prices. Seems like they’re just absolutely off the charts. And I know our listeners are anxious to gain some insight on what happens from here. So to get us started, I’m hoping you can give us a little history lesson, if you will, on how the situation has evolved going back to before COVID. And I know there were numerous factors, including tariffs and others, that set things in motion. So if you can give us the lay of the land, that’d be great.

Michael Sullivan: Great, Steve. In the last 15 or 20 years, the United States has always had 15% or 20% of its steel product from overseas suppliers. And in that period, almost continual barrage of subsidized products were being dumped in the United States. Those would result in suits in the Federal Trade Commission or wherever, and there’d be duties and tariffs against particular goods. And this would play out against rebar in June. And then in July, the same thing would be going on in say, steel beams or piping tube. And it was this whack-a-mole where the government was always trying to protect the steel industry against a certain range of products or against a certain producer or a certain country. And this continued for literally a decade until finally in 2018, the Trump administration imposed tariffs under the section 232 of the Federal Trade Commission code. And that tariff on virtually everything.

Michael Sullivan: The result of that was stronger environment for domestic steel producers. And resulting from that was a renegotiation of the NAFTA agreement, which now becomes the USMCA, United States, Mexico, Canada trade agreement, which is hopefully more favorable to the United States. It resulted in quotas from certain countries where they said, okay, we’re only going to send in this much. And it didn’t affect prices, there were no tariffs, they were limited by the quantity they could ship in. There were other countries that agreed to other certain restrictions. Tariffs remain in effect against certain products in certain countries.

Michael Sullivan: The result of that was pre-COVID, a relatively healthy US domestic steel industry that was selling at prices high enough that it was profitable, demand was good, providing economies at scale. And so we go into 2020 with a relatively healthy, profitable steel.

Steve Katz: Good background. So then March 2020 comes, we have the arrival of the pandemic, which brings the economy to a halt in markets all around the world. What happens next to effect the steel market?

Michael Sullivan: If we all remember in the beginning, we weren’t quite sure how spreadable it was. And literally the economy ground to a halt. Auto plants closed, appliance plants closed, construction came to a halt. There was no demand. And we were a point when the steel industry had no demand and about 50% of domestic capacity was taken offline. And in that period, unsure of demand, what limited demand remained, people were supplying from inventory. Instead of buying new stuff, they were consuming the inventories on hand. And if we look at people who imported that 20% or 25% of foreign goods that’s always coming into the country, you have a four month lead time stuff, and always sketchy on actual lead times. It could be more, it could be less.

Michael Sullivan: So now you have no demand, you don’t know when demand’s coming back, you’re watching domestic market prices fall. And so if you are an importer of steel, you’re pretty reluctant to go long on foreign goods. And so demand for foreign goods dropped.

Michael Sullivan: So now as we go through the May, June, July period, there is no demand, people are consuming inventories. Maybe we get to August and people turn and say, “Hey, we’re taking steps to protect the workers. We can open the plants again.” People are going to work. There was demand. The residential housing is sky rocketing. There’s some capital projects, construction that was already in process continued. And so demand begins to grow again.

Michael Sullivan: And as we get vaccines in the United States and around the world, now demand goes, but the supply chain is empty. All throughout the supply chain, the inventory has been driven down. And so what you need, you basically got to get from the mills. And now the mills are at capacity. But a blast furnace, isn’t your refrigerator. You can’t turn that on and turn it off. It takes time to ramp back up. You got to bring crews back. You got to reshuffle. You got to get supply.

Michael Sullivan: And so as the steel industry expanded again, they were behind the eight ball, and they remained so for about a year. And so tight supply, a lack of foreign goods into the country has driven up prices. And what we’re seeing in the United States, we’re seeing everywhere as the world expands. And the elimination of inventory throughout the supply chain is true in Europe, it’s true in China. And so what you’ve got is too much demand chasing too few goods. And that always leads to the basic laws of supply and demand. There are some things that are driving up the cost of steel. Energy is now increasing in price. Some of the raw materials are increasing in price. And so there are cost drivers, but a lot of this is just supply and demand.

Steve Katz: Okay. Michael, where are prices now? What’s going on with pricing today?

Michael Sullivan: Steve, I always like to talk about hot-rolled. That’s kind of my bellwether, hot-rolled steel coils. And that’s kind of my baseline because cold-rolled steel coils come from hot-rolled. So if hot-rolled goes up a dollar cold-rolled goes up a dollar five or a dollar ten. And so galvanized hot-rolled coils go up. And things like piping tube are made from hot-rolled coils. And so as hot-rolled coils go up, it drives a whole list of products. And if we looked at hot-rolled coils and you looked at rebar and you looked at steel plate and steel I beams and stuff, you would see a similar pattern. But the coil industry in the United States is huge and the much more volatile than some of the other types.

Michael Sullivan: For the past two or three years prior to the pandemic, hot-rolled coils were in the 550 to 650 range. And it’s my opinion, and maybe not everybody would agree, that in that range, the steel mills are breaking even, or making a little bit of money.

Michael Sullivan: And so we go into the pandemic in that $600 range, pandemic hits, there’s no demand, prices fall to 450 a short. Now demand comes back and prices go up 50, 60, $100 a month. And they just keep going, peaking in say, September at almost $2,000 a ton, compared to $600 a ton in the 2019 and ’18 period. So we are at unprecedented levels. We’ve never been anywhere close. Back in 2007, there was a big run up and hot-rolled went to say, $1,300 a ton. Nothing like we’ve seen. So we are at the highest levels we have ever seen in the United States. And we kind of remain now, they’ve peaked in the $2,000 range. Now they’re getting closer to $1,900 a ton. For most products, we are off our peak, but we remain at very high levels.

Steve Katz: Okay. So when I think about what you’re saying, I picture in my head a freight train. This is kind of like a freight train with no breaks in that it seems like it’s an unstoppable trend of increasing pricing. And I’m wondering, are there certain conditions that are developing, or are there factors in your opinion that are likely to stop that train?

Michael Sullivan: We’ve seen this in the steel industry. We’ve seen these run-ups and then collapses before. Every 3, 4, 5 years we see significant changes. And what happens is it basically runs out of steam, that the supply chain gets full again, we’ve replenished inventory throughout the supply chain, and now demand drops. And so the mills start chasing orders by reducing prices. And simply put, I expect prices to go back down because historically they always did.

Michael Sullivan: Now on top of that, we’ve got a more friendly administration. We still have 232 tariffs against certain countries and products in Europe. I would expect that to be resolved. We still have an automotive chip shortage, which is restricting the output of automobiles. So demand for steel for automobiles could be negatively affected. Prior to the pandemic, there was a lot of steel coming online. So we have new capacity coming online soon, domestic.

Michael Sullivan: More recently, a lot of foreign goods that were ordered, they were stuck on ships that were late because the mills in Europe or Asia were shut down, those are starting to arrive. So we see a lot of factors that are going to weigh on prices. And so for that reason, I think we’ve hit the peak. And I think we’re going to drift back down.

Michael Sullivan: Now, I don’t believe personally, we’re going back to that $600 range. I think we’re going to end at higher prices that’ll be long term. I don’t think we’re staying anywhere near $2,000 a ton. But if you said a hot-rolled coil will be $800 a ton or more for the next three or four years, I’d easily believe that.

Steve Katz: Okay, interesting. Well, so based on some of the circumstances you’ve cited and the factors such as increasing cost of manufacturing, the raw materials, what steps are manufacturers taking now to adjust, and is it really helping?

Michael Sullivan: I think, Steve, there’s still a concept out there of this aging, dying steel industry. And when I think of the steel industry, I think of something that gets younger every year, that older mills are shutting down and being replaced by new mini-mills that are the most efficient and lowest cost mills probably in the world using the latest technology.

Michael Sullivan: When I look at the integrated mills, which are mills of old, I see them replacing older technology with computer control technology. I see them consolidating operations.

Michael Sullivan: And so we basically have two ways to make steel in this country. Fully integrated mill takes iron ore, and metallurgical coal and limestone, and melt it in a blast furnaces, refines it in a basic oxygen furnace, makes slabs, rolls slabs into coils.

Michael Sullivan: The other method is a mini-mill which basically melts scrap, casted into thin slabs. In a modern technology, those thin slabs immediately go through a hot-rolled furnace, which converts them to a coil. And so you go from scrap to a coil in a couple of hours. An integrated mill goes from iron ore to a coil in a couple of weeks.

Michael Sullivan: Nucor the first mini in 1989, and it changed the industry. Nucor came out this revolutionary guy with revolutionary technology, and he was battling the staggering giants who had been porpoising in and out of bankruptcy for a decade. And so you had the march of the mini-mills. And first there was Nucor. And then some guys left Nucor and started Steel Dynamics. And the list goes on. And with each year, the quantity of coils made from the integrated mills has been reduced. And the percentage produced by these mini-mills is increasing.

Michael Sullivan: More recently, so you’ve got the integrated mills struggling. They all went through bankruptcy, they were consolidated. And so we have fewer players. We go back two years, the country’s largest iron ore producer, Cleveland Cliffs buys AK Steel. A year later, they buy ArcelorMittal Steel USA, and ArcelorMittal USA was a roll up of all these older US integrated steel mills that went through bankruptcy, initially were International Steel Group, and then purchased by ArcelorMittal, and as I said, ArcelorMittal recently sold to Cleveland Cliffs.

Michael Sullivan: So now Cleveland Cliffs, which probably a hundred years operated as an iron ore producer, is now the country’s biggest steel producer. And what they’ve done is they’ve got the biggest fleet of facilities, the biggest fleet of blast furnaces. They’ve got captive supply for their major raw material. And it’s a new game in town. So the other only major integrated steel mill is US Steel. So you’ve got two significant integrated players, US Steel and Cleveland Cliffs, and you’ve got five or six mini-mills, and you’ve got some regional mills, three mills that I can think of in Canada, two other mills that buy slabs offshore and bring them in.

Michael Sullivan: And so you’ve got a much more competitive industry. And so when the automobile contracts come out each year, General Motors or Ford or Chrysler or the new domestics, the Toyotas and everything of the world, they could go to US Steel and say, “Hey, we could buy this from you. We could buy from AK Steel. We could buy from ArcelorMittal. So we want a good price.” Well, now there’s fewer players, so you can’t play off ArcelorMittal against AK anymore, because they’re part of the same company. And US is well aware that there’s fewer competitors out there.

Michael Sullivan: And so we’re going to see the steel mills be able to hold their ground now and be able to sell things at higher prices. And so this march to oligopoly is going to provide again, a younger, stronger domestic steel industry that’s better equipped to control prices within the market. And I think this march to oligopoly, I think it’s going to be beneficial to the steel industry as a whole. It’s going to be beneficial to those who use steel. And why it’s going to be beneficial is it’s going to take these radical swings out. It’ll make it easier to plant for their buyers, for the guys that make tubes, for the guys that fabricate goods from any kind of steel product. It’ll make it easier for them to make their decisions, to make how much is it really going to cost to me? Can I go forward with this project, because I know steel is going to be $800 a ton? Or steel goes to $1,500 a ton. Am I going to get crushed?

Michael Sullivan: So I hope more healthy industry, higher sell prices, greater stability. And I think that’s really for the benefit of everybody.

Steve Katz: It’s interesting thinking about the current environment as this march towards oligopoly is a great way to frame it up. I think it does help to crystallize what’s happening. I think when I hear you say that, I think back to what you said earlier about prices always do collapse. I’m wondering in this situation, is it likely to be less of a collapse and more of a pullback that lands somewhere above where it was pre-COVID, that then is followed by some point in the future, more of a true collapse? That may or may not be the case. I’m just kind of putting that out there. And then what are we likely to see and what kind of timeframe are we talking about there?

Michael Sullivan: Historically, Steve, they come down by twice as fast as they went up. So if we went from $600 a ton in August of last year to $2,000 a ton in October of this year, that’s almost 80 to $100 a ton a month. I don’t think we’re going to see prices going down 100 to $150 a ton a month. I think we’re going to see a gradual decline.

Michael Sullivan: The economy does remain strong. The economy is expanding. And it’s changing. People moved out of the cities. They bought houses in the suburbs. They’re buying cars. Auto sales weren’t as good as predicted this year because of the chip shortage. I think energy is coming back. And I know energy is a dirty word, but we continue to need it. And I think the rig town is going to go up. We’re probably going to have some real serious discussions this winter when we find the electricity is constrained because we’ve been rushing to cut power plants and go green. Just not enough green yet.

Michael Sullivan: So I think that we’re going to drill more. I think we’re going to have that demand. I think when chips are available, I think auto is coming back. And so I think we’re now an inflection point where supply is increasing and that’s going to drive prices down. But I think the economy is healthy and I think that’s going to drive prices, be a positive effect.

Michael Sullivan: I think we’re eventually going to have an infrastructure plan from the government that’s going to stimulate the economy and a lot of it’s going to be steel. It’s going to be rebar, it’s going to be I beams, it’s going to be plate. So I’m optimistic for the United States. I’m optimistic for the world. As we see it, India continues to industrialize. China seems to be slowing down. But they fulfill most of their own demand. So I’m optimistic, Steve. I don’t see a free fall. I see prices moving down. I don’t see a free fall.

Steve Katz: Okay. Good perspective. Good perspective. Believe it or not, we’re running out of time, so I guess this will be our last question. To wrap it up, can you give us your top line synopsis on what this all means in the near term and specifically how it impacts asset-based lenders with steel companies in their portfolios? Because I know many of those who are listening in are in that position and really want to understand that a little bit better moving forward.

Michael Sullivan: Yeah, great. So Steve, when we look at asset-based lending, what is the value of this stuff? The company failed. What is the value? What could they sell for? Well, on the way up, you’re sitting on an inventory with an average cost of $1,000 a ton, and you’ve got steel coming in the door at 13 or $1,400 a ton. Well, if a company was to liquidate under an asset based lending scenario, well hey, things are looking pretty good.

Michael Sullivan: But the truth is companies tend not to fail. At least in the steel industry is we see it and the way it’s evolved, you’re not failing when you’re selling old $1,000 ton steel at $1,500 a ton. What happens is on the downside when your average cost of acquisition is 1800 and the market is moved. As we talked about, if the market was to free fall to $1,500 a ton, suddenly you’re selling steel at a loss. And we’ve seen that in prior periods. So the slower the decline, the better for everybody.

Michael Sullivan: And the other thing that’s happened in this period that wasn’t always true in prior period is that inventories have remained low. I deal with various people, various steel buyers and distributors and fabricators throughout the industry. Inventories remain low. And if your inventory is low, that means that you are exchanging, you’re using this month what you got in the door last month. And because of that, everybody’s pretty close to the market. And if the market goes down $50 a ton right now in October, chances are the steel you bought this month is the stuff you bought in September. It’s not the stuff you bought months ago.

Michael Sullivan: And so on the downturn, and I do believe it’s coming, on the downturn, I think the inventories are going to be much closer to market than they have been in prior periods. Your inventory may be 10% or 15% below market, but in 2008 global economic crisis, steel went from say $1,300 a ton to $600 a ton in five or six months. In those periods, we saw people whose steel inventories were at 50% of replacement cost. Michael Sullivan: I don’t see that happening here. I see a more gradual decline. And because inventories again, remain constrained, everywhere I go, things are getting better, but they remain constrained. And current inventories are much closer to current market prices than I’ve seen in some of these prior periods.

Michael Sullivan: So in that regard, I think our asset-based lending guys can breathe a little sigh relief. And right now the next inflection point is going to be more gentle than we have in the past. And we’re going to slowly settle to a period where supply increases, prices come down more slowly, settle at prices that are higher, and then hopefully enter a period of stability.

Steve Katz: All right, well that sounds like relatively good news. And as always, listen, great overview you of where the market is, how we got here, and what lenders and others who are invested in this industry need to be focused on right now. I don’t know how you manage to fit so much info in our brief time together. So it’s great, great stuff. I really appreciate it.

Steve Katz: And for those of you who are listening in today, if you have exposure across the steel, aluminum, or other metals markets, it probably goes without saying that at this point, it certainly seems like it would make sense, be in your best interest to reach out to Michael and the Hilco team with any questions, concerns, or just for a chat to gain further perspective on the market this fall.

Steve Katz: With that in mind, Michael’s email is That’s M as in Michael Michael, thanks once again for joining us today. Great talk. Michael Sullivan: Always a pleasure. Steve. Look forward to our next adventure.

Steve Katz: Me too, me too. And listeners, we hope that today’s Hilco Global Smarter Perspective podcast provided you with at least one key takeaway that you can put to good use in your business, or share with a colleague or client to help make them that much more successful moving forward. Until next time for Hilco Global I’m Steve Katz. This transcript was exported on Oct 27, 2021 – view latest version here. Metals Podcast – Hilco Global Smarter Perspectiv… (Completed  10/26/21) Transcript by Page 1 of 2

Headshot Michael.Sullivan

Michael Sullivan

Vice President
Hilco Valuation Services phone vcard linkedin

Let’s connect and work together

If your business or a business in your portfolio is facing a current challenge, our team can provide a qualified perspective and experience-based guidance toward an optimized resolution.
Contact us