Do February Indicators Offer Signs of Hope to Battered Steel Industry?
US steel prices
As discussed in the previous parts of the series, the current spread between spot hot rolled coil (or HRC) and cold rolled coil (or CRC) prices are the highest that we have seen in the last few years. Reversion theory might suggest that HRC prices could rise to bring the spread near the long-term average as the rise in CRC prices has been more than the rise in HRC prices. However, there are several other factors that go into steel pricing. In this part of the series, we’ll explore the possibility of a downward correction in CRC prices rather than a rise in HRC prices.
Weak global prices
The chart above shows the spot HRC prices across various regions according to the data compiled by SteelBenchmarker. As you can see, US steel prices are still much higher as compared to the average world export prices. Here we’re not just talking about the usual low-cost exporters like China and India. US HRC prices are currently higher than the prices in Western Europe also.
Note that ArcelorMittal (MT) gets almost half of its revenues from Europe. U.S. Steel (X) also has sizable operations in Europe. On the other hand, AK Steel (AKS) and Nucor (NUE) get most of their revenues from the US markets only.
Prices might not rise much
It will be very difficult for US steel mills to raise their spot offers if international steel prices stay at depressed levels. Trade cases have helped reduce imports from China, which has been slapped with prohibitive duties. However, if US steel prices were to rise from these levels, we could see import pressure coming from other regions including Europe. Steel mills in Europe are struggling with demand slowdown and more imports from China. Exporting steel to the US could be the much-needed lifeline for European steel companies.
Meanwhile, US steel prices might also not fall much from these levels as we’ll explore in the next part of the series. Investors who want diversified exposure to the materials sector can also consider the iShares US Basic Materials ETF (IYM). Almost 14% of IYM’s holdings are invested in metal and mining companies.
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