Manage episode 292399759 series 2084625
On today’s show I’m going out on a limb to predict a fall in steel prices over the coming months. This will benefit the cost of many types of construction including industrial, and concrete structures such as apartment buildings and condo towers.
While the industry insiders are not yet making this claim, I’m going to construct a thesis for this prediction and connect the dots for you. At the end of this, I believe you’re going to be convinced that my prediction has some validity.
I can’t tell you exactly how much steel prices will fall, or even for how long. All I can tell you at this juncture is that steel prices will fall.
The headwaters of this story start at a microchip manufacturing plant in Japan. You’re probably thinking, what does a chip manufacturing plant in Japan have to do with the price of concrete construction.
About 6 weeks ago there was a fire at a Renesas semiconductor plant in Naka Japan, just NE of Tokyo. This 300mm facility manufactures chips largely for the automotive industry. In fact, Renesas commands about 1/3 of the share of the market for microcontroller chips used in automotive applications.
The fire impacted about 6,500 SF of clean room, and destroyed 23 machines that are used in the manufacture of chips.
Two weeks ago, Renesas executives announced that they had completed the cleanup and were preparing to restart partial manufacturing capacity by the end of April and hoped to restore full capacity by July.
But even before the fire in the Renesas facility, there were signs of chip shortages in other semiconductor manufacturing facilities.
The impact of the chip shortage on the automotive industry has been estimated at as much as $60B this year. Some auto manufacturers have issued warnings about production cuts as a result of the chip shortage. Volkswagen is estimating production cuts of 1.3M units in the first quarter of 2021, and the cuts are expected to be even wider in the second quarter. The new merger of Fiat, Chrysler and Peugeot called Stellantis is estimating an 11% drop in production. Supply of chips is not expected to stabilize until Q4. Honda and Nissan have reported significant shutdowns in their factories due to the chip shortage.
The chip shortage means that consumption of steel from the automotive industry is also reduced by a large margin. One of the commodity metrics used to measure pricing in this sector is the Domestic Hot Rolled Coil Steel Futures price. This price is measured in USD per metric tonne. Generally speaking, the price for Steel from China is approximately 50% less expensive than the price for steel in the US of Europe. Transportation costs reduce the price gap somewhat at the point of consumption.
While Steel prices are currently at an all-time high with a solid upward trajectory since the middle of 2020, I see the drop in demand from the auto industry creating a softening of prices in the coming months and a stabilization of prices.
The rapid increase in the price of softwood lumber for construction has caused some builders to substitute steel for wood in some applications. That substitution has increased the demand for steel framing in applications that traditionally would not have been considered candidates for steel consumption. There are signs that lumber mill production is starting to catch up to the demand and we should see prices for lumber fall by the fourth quarter for lumber. As soon as that happens, the demand for steel framing in applications that would have used wood should evaporate. The construction industry will quickly switch back to the less expensive wood framing instead of steel as soon wood prices start to moderate.