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00:00I want to get to the state of the steel industry, but what is dominating in terms like thematically
00:05at the Industrials and Basic Materials Conference right now?
00:08Yeah, that's a great question. Nice to be with you, Tim and Alex. We have the leadership teams
00:12of more than 100 companies and 400 or 500 investors all in one location this week. So
00:16we're excited to get started this evening. I think data centers in the Iran war will certainly be top
00:21of mind for a lot of people joining us. In steel specifically, I think we're probably more focused
00:26on pricing and this frankly very strange supply-demand backdrop. Sam, one of the big debates right now is
00:32whether the AI boom creates this multi-year structural tailwind for steel for the build-out
00:38of data centers. Do you think that at this point there is tangible demand or is this just market
00:43enthusiasm? Yeah, Alex, that's a good question. I think obviously data centers are dominating the
00:50headlines and steel is necessary for their construction. When you think about the construction
00:54needs in rebar, structural, data center-specific applications like racking or airflow containment,
01:01but U.S. data center construction is expected to be about 80 million square feet this year.
01:06Every 1 million square feet of data construction requires about 14,000 tons of steel. So quick back
01:12of the envelope math, that's about over a million tons of steel that'll be required for data centers
01:16in 2026. And initially you might say, oh wow, a million tons, that sounds like a lot,
01:20but the U.S. will probably produce around 90 million tons of steel this year. So a million tons
01:26out of 90, it's kind of a drop in the bucket at this point. So not yet a big driver
01:30of demand,
01:30but something obviously we want to stay aware of moving forward.
01:33You say not yet, does it ever become a bigger driver than a million?
01:38Well, sure. I think, and I'm not a data center expert, Tim, but I think there will be more than
01:4480
01:44million square feet of construction next year and maybe more the year after that. So maybe it
01:49continues to grow, but as of now, data center steel demand is only about one, one and a half percent
01:55of the U.S. steel market.
01:56So where does the demand come from in the U.S. steel market?
02:00Yeah, the demand in the U.S. steel market, I think you said it at the open, automotive service
02:04centers and construction are the big industries. And we can walk through that, but right now I think
02:11it's more of a supply-driven story. If you look at supply right now, we track U.S. overall
02:17production on a weekly basis. The latest weekly production number we saw was the highest tonnage
02:22since March of 2020. And year-to-date production is up almost 8%. So given this fact, you would think
02:28that demand must be humming or buyers are getting all the steel they need and lead times might be coming
02:33down. But none of this is the case right now. I think buyers are pretty frustrated that they can't
02:38get the steel that they need from the mills. Does the resilience of the steel market have
02:42to do with these favorable supply and demand dynamics or are the fundamentals are actually
02:47improving? I think the supply-demand dynamics are playing a big part of it. Obviously, you and I
02:52can't go buy a 50,000-pound coil from the hardware store. You have to buy these steel coils in
02:58one of two
02:59ways from the mills. The major one is contract tons, weekly, monthly, quarterly agreements. And
03:05customers typically agree to the mills to buy within a minimum or maximum tonnage range. Right
03:11now, there's not a mill in the country that's allowing their customers to buy at the max end
03:15of that range. In fact, most of them are holding customers to the minimum end of that range. And
03:20that's true for a couple of months. This is pushing out lead times and really strengthening the pricing
03:24upcycle we've seen. The other way to buy steel is what's called spot tons. Now, I order it now and
03:29you get it to me whenever it's ready. Those are basically not available in the market at all right
03:34now. You saw U.S. Steel restart its Granite City furnace in Illinois back in late March. And that
03:39thing immediately booked out through like the end of July. So steel buyers trying to get what they can,
03:45but for now, it remains to the advantage of these mills to keep showing discipline and keep the
03:50inventories lean, like you said, Tim. Yeah. Talk more about tariffs and the way that tariffs are
03:55affecting the U.S. steel industry and what imports are looking like. Imports have always been a big
04:00watch point in this sector, but even more so since the Section 232 tariffs were raised to 50% almost
04:05a
04:05year ago. Last year, we saw steel imports down 10 or 15% year on year. There was a dramatic
04:11pullback
04:12in the second half of the year after the tariffs were instituted. And the tariffs continue to work
04:16this year to keep out foreign supply, which obviously makes the domestic steel makers happy.
04:20Steel imports this year are down almost 25% year to date.
04:23Is there a difference between imported steel and U.S. made steel?
04:30According to the administration, there certainly is. And according to the domestic steel makers,
04:34there certainly is. That's what I'm getting at. What do they say is?
04:38Obviously, it protects American jobs. It protects our national security. There are a lot of reasons to
04:43use steel here. It's made here. But I think the one thing from the buyer's perspective that maybe
04:48doesn't get enough attention is right now, the standard hot rolled lead time is about seven
04:53weeks. It takes at least three months for me to get a cargo ship here into the country. So for
04:59the
04:59buyers, it makes a lot more sense still, even with the elevated price, because right now supply sort of
05:06trumps price. I think availability is top of mind for buyers right now. So the closer to steel it is,
05:12the more they're interested.
05:13Sam, one thing that we talk about all the time is rising prices of electricity as a result of data
05:18center demand and data center construction. When we think about this from the steel production
05:23view, do rising electricity prices affect these steel producers? Or is their energy source different?
05:33Is their energy source coal, for example, and they're not seeing it hit as hard?
05:38Now, electricity is certainly a big portion of steel mill costs.
05:44And is it increasing for them the way that it's increasing for consumers? Are they able to,
05:49like, how does that work and sort of how they're thinking about their own bottom lines and controlling
05:54for that cost?
05:56A lot of steel mills, Tim, hedge their electricity costs, or they have long-term fixed contracts.
06:02I think if we talk about inflation and maybe the Iran war more specifically, I think there are two
06:07main things to talk about with steel mills as it relates to the war. And steel stocks can sometimes
06:13behave as hedges against inflation, given that metal is a tangible asset whose price typically
06:17rises with inflation. Big inflation in March and April, and these stocks have done really well.
06:23I'm not an economist, but Tim and Alex, I don't think you guys know anybody either who thinks
06:27inflation is returning to 2% anytime soon. And the second, maybe more important than electricity right
06:32now is oil, more specifically diesel, because domestically, steel is transported by truck or
06:38rail. So think about when you're driving down the highway, you see the big coils on the semi-trucks.
06:42That isn't a cheap freight route. And diesel prices have increased about 50% since the start of the
06:47Iran war. And that's a surcharge that mills typically pass on to customers, and that keeps prices high.
06:53Sam, I'm going to switch gears a bit. Earlier this year, we were talking about how retail was
06:57aggressively trading in metals markets. Is that a phenomenon that's still happening?
07:03Yeah, that's frankly not something that I can speak that well to for my current position. We
07:08don't speak with a lot of retail investors. Are institutions heavily involved? Yes.
07:18Sam, I want to talk a little bit more about the industry and certainly automotive here. We're
07:22going to talk about Ferrari a little later, just kind of a fun little tease for our 407 segment about
07:27that new EV coming from Ferrari. Hannah Elliott's going to be joining us. The tariffs on auto companies,
07:35the reason I say U.S. auto companies is because the auto industry is being hit with tariffs because
07:40the U.S. auto industry is global. I mean, Mexico and Canada in recent years have been a huge part
07:46of
07:46production. How does the supply chain of the auto industry work for steel in terms of where it's
07:54transported and where these cars and trucks are actually built? Because we know that Ford
08:01has suffered as a result of an outage at a steel facility in New York.
08:06Mm-hmm. So if you talk about it from the steel perspective, you have Cleveland Cliffs in the
08:10Midwest, you have Steel Dynamics in the Midwest, and you have Nucor that kind of dominates the South,
08:14but they're building a big new mill in West Virginia right now. All of those companies supply
08:19to automotive. And then typically, Tim, to your point, they run through service centers who do the
08:25value-added work, whether it's pickling, annealing, whatever you need to do for automotive. And then they
08:30ultimately ship it to the OEM. I think in the automotive market right now, it's sort of a
08:35dichotomy. You know, medium and heavy trucks and maybe the nicer vehicles, the demand there is still
08:40not that bad, kind of to your point earlier. But I think we've seen affordability and interest rates
08:45really weigh on the more economy class vehicles. And those can be bigger volume loads for the steel
08:50mills because you can typically churn out more cheaper cars. Sam, we had a strong earnings season for
08:57metals and basic materials companies. Can you tell us about some of your takeaways from the reporting
09:02cycle? So we talked about the supply picture already, and I think it's probably important to
09:09talk about pricing next. The typical steel pricing upcycle usually lasts anywhere from three to four
09:17months. We are in the midst of a nearly nine-month March higher in steel pricing. We're up near $1
09:23,100
09:24right now. We think it probably has a little bit longer to go. I was talking to somebody a few
09:28days
09:29ago who thinks we're going to get to $1,500 hot rolled coil. And in a normal year, steel pricing
09:33typically peaks in the late spring, early summer. But this year, I would look for the peak to happen
09:38maybe more in August or September, really expanding the gains that we saw in the first quarter that you
09:44pointed out, Alex. And so why is this happening, right? Why is this steel pricing cycle so long?
09:50Typically, when steel pricing rises, you can bet your mortgage that one of two things is going to
09:55happen. The first is that someone dumps a bunch of tons into the market to take advantage of the
10:00high prices, thus increasing supply and lowering the price. And the second thing that can happen is
10:07someone undercuts market pricing to secure themselves a bunch of volume.
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