Q4 Steel Prices – Can They Defy Gravity?

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Guest contributor James May is managing director of Steel-Insight.

North American HR coil steel prices have traded in a narrow range between $650/US ton and $700/ton for over a year. This lack of volatility is virtually unheard of in what is usually a market characterized by substantial ups and downs.

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What makes it even more incredible is that North American prices have been able to remain elevated while steel prices in the rest of the world have been in steady decline.

The result is that US prices are at a significant premium to the rest of the world – currently around $200-250/metric ton.

Global Hot-Rolled Coil Prices (US$ per metric ton)


Source: Steel-Insight

Unsurprisingly, that has led to rising imports of steel to the United States. However, the surge in supply has not been as large as in previous periods when US prices outperformed.

First, steelmakers in many countries are cautious about supplying for fear of being hit by anti-dumping action. They are disciplined enough to take the higher prices (thanks very much!) in order to maintain a long-term presence in the market. We note for example, that European supply of steel products has barely increased.

Those suppliers that can’t resist supplying the market such as China and India in CR coil and HDG have often outsourced their export sales to 3rd party suppliers such as traders that do not necessarily have the long-term interests of their clients at heart. In our opinion, they will be hit with an anti-dumping complaint by the new year.

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Second, domestic supply has struggled to meet the strong demand. The extended ice cover on the Great Lakes curtailed deliveries of iron ore through May and forced Great Lakes’ steelmakers such as US Steel and Essar Algoma to trim output. Meanwhile, the aged equipment of much of the North American steel industry means that it is hard for the industry to run at full stretch. Mishaps at AK Steel in Q1 and a roof collapse at US Steel’s Granite City works in Q2 caused unexpected outages and backlogs.

Meanwhile, the automotive industry — that accounts for around a third of North American flat product demand — has been growing at a cracking pace, while construction expenditure (another third of demand) is up 5-6% year-on-year so far in 2014. Other markets are patchier with strong demand from appliance, rail and consumer goods partially offset by a struggling welded OCTG market and a lackluster yellow goods industry.

Steel-Insight suggests that US flat steel apparent consumption was up 8.6% in the first half of 2014, but domestic shipments were up just 2.9%.

The situation is now changing. Imports have risen throughout the year. Meanwhile, the US industry is now operating at higher levels – it hit 80% utilization last month. Inventory is beginning to rise at distributors.

US HRC, CRC & HDG Imports


Source: US Department of Enforcement & Compliance

The slight easing of the market in recent weeks is indicative that the steel industry is not as tight as it was. We expect prices will drop to the lower end of their trading range – around $650/ton by the beginning of October.

Yet inventories are under control, there will be some supply outages later in the year at steel mills for maintenance and demand shows no sign of slowing. With US mills probably taking action against Chinese and Indian imports by the end of the year, supply will remain an issue, and we wouldn’t be surprised to see another rally back up to $700/ton by early 2015.
Steel buyers in the USA will have to pay up to 50% more for their steel than their Chinese counterparts for some time to come. Did I really hear you say re-shoring?

Steel-Insight is a steel industry price-forecasting publishing company, based in Toronto. James May, the firm’s managing director, has been a steel industry analyst for 15 years and advises some of the major global steel trading companies, steel producers and steel consumers on the outlook for steel pricing and industry trends. For more information, visit www.steel-insight.com.

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