The Raw Steels MMI fell 5.9% to 48 points, the first time our index has ever fallen below 50 points and, of course, another all-time low.
Steel prices continued to fall in October, stressing the risks of buying large quantities when prices look “cheap” while the market is in bearish mode.
As with any other metal, China continues to be the main price driver. Chinese exports of finished steel keep rising. The latest figures showed a 27% increase on the year-to-date compared to the same period last year. Moreover, while exports keep increasing, production in the country hasn’t declined significantly, underscoring that the extra material is a direct result of weaker demand in China.
Declining Market-Based Production
Cheap Chinese imports combined with the glut of inventory explains the decline in US steel production. Capacity utilization fell to 71.3% in October. Adjusted year-to-date production through October is down 8% while capacity utilization is also significantly down from the same period last year. Capacity utilization remains persistently below 80% this year, hurting the revenues of American steel mills.
Not only domestically, but low prices continue to hurt steel manufacturers around the globe. In October, steelmaker Tata Steel announced 1,200 job cuts in the UK. The decision came only weeks after Sahaviria Steel Industries announced 2,200 job cuts due to the closure of one of its facilities. It is estimated that less than 50% of global steelmakers are profitable at current levels. High-cost mill closures have already taken place, but they are minimal in the context of overall capacity.
Other than the oversupply, and the continuous lack of demand, production costs are also helping bring prices down. In October, crude oil was unable to rise, remaining below $50/barrel for the third consecutive month. In addition, iron ore prices remain at low levels and capacity expansions won’t likely help to push iron ore prices up. Total iron ore supply is estimated to increase by 105 million metric tons in 2015 with more to come in the following years, with some analysts calling for iron ore prices below $40/ metric ton next year.
What This Means For Metal Buyers
Steel prices are at very low levels but that doesn’t mean that we’ve hit bottom. Other than lower production costs, steelmakers keep producing in order to avoid job destruction and giving away market share. Hopes that demand improvements will help prices might never become a reality. Prices might have to drop further down until forcing a tide of closures.
Actual Raw Steel Prices
The US HRC futures contract spot price fell 11% from $447 per short ton to $397/st. US shredded scrap ended at $179 a metric ton, down 16% from $214/mt while Korean slab steel fell 26%. China slab prices remained stable at 307.06 CNY/mt from 265.68 CNY/mt.