Raw Steels MMI Slides: A Warning For US Steelmakers?

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Our Raw Steels MMI fell from 56 to 55 in July.

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U.S. steel prices have had a spectacular run this year, mostly attributable to trade cases as the U.S. steel industry has turned into a virtual island, creating a divergence between domestic and global steel prices. That was the case during the first half of the year but nothing guarantees that this trend will continue in the longer term.

Prices In China Fall

In the first half of the year, prices for hot-rolled coil in U.S. have risen over 70%. Although trade cases are what helped U.S. steel prices the most, the domestic rally was also supported by rising steel prices in China.

Investors’ sentiment in the steel industry improved this year as China’s stimulus measures made an impact on steel demand. Also, the world’s biggest steel producer vowed to cut production capacity by 45 million metric tons this year and 100-150 mmt over the next three to five years. This combination of demand and supply measures boosted sentiment in the steel industry and prices in China increased.

But as time goes on, China is failing to meet its promises. China produced more steel than the rest of the world combined in May. According to the World Steel Association, China produced 70.5 mmt of crude steel products in May, up 1.8% from the levels of a year earlier and just shy of the record 70.65 mmt level hit in March 2016.

Raw-Steels_Chart_July-2016_FNL

On top of that, demand doesn’t seem to be offsetting rising production. Exports keep rising. In May, China exported 9.4 mmt of steel, a 2.3% increase compared with a year earlier. For the first five months of the year, exports are up 6.4%. Given these numbers, 2016 could turn out as another record year for Chinese steel exports.

The continued growth of these figures worries steel investors. That is being reflected in the price action. Hot-rolled coil prices in China have fallen more than 20% from their April peak and the decline could be even more severe if Beijing doesn’t come through with more mini-stimulus in the second half.

US Steel Prices Flatten

The decline seen in Chinese steel prices haven’t hit domestic prices, at least not yet, but could be pointing to some domestic price turbulence in the second half.

Indeed, over the past few weeks the rally in U.S. steel prices has lost some steam, keeping domestic steel prices pretty much flat in June.

Falling U.S. steel imports caused prices to rally this year. However, the rate of decline last month was the lowest in 10 months. In fact, absolute import levels have increased on a monthly basis since February. An increase in steel imports later this year serves as one of the biggest risks facing U.S. steelmakers, considering the current price gap between domestic and international prices.

Should service centers come back into the market and restock with imports, domestic mills may see some price pressure. If prices in China continue to decline, this is something that steel buyers should watch.

Finally, steel stock values have also lost traction. Domestic steel prices directly impact the stock prices of steel producers in the U.S. Since May, we have witnessed investors’ enthusiasm for these companies vanish. This is an early sign that domestic steel prices could suffer a correction.

Free Download: Compare Prices With The June 2016 MMI Report

To conclude: Domestic steel prices haven’t shown signs of weakness, but this rally seems overextended and prices might struggle to build on their gains if international prices continue to fall.

Actual Steel Prices

The Chinese slab price fell 1% to 384.64 CNY per mt. US shredded scrap fell 8% to finish the month at $250 a mt. Chinese HRC declined 1% to 377 CNY per mt from 381 CNY a month ago. The U.S. HRC futures contract rose 2% to $575 per mt.

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