CRC-HRC Spread at Record Levels: Will it Revert to its Mean?

The price of domestic flat steel products declined in August. Interestingly, cold-rolled coil prices (CRC) declined less than hot-rolled (HRC), widening the unprecedented price gap that we are witnessing between these two.

Domestic CRC-HRC price spread at record highs. Source: MetalMiner Index
Domestic CRC-HRC price spread at record highs. Source: MetalMiner Index.

The supply-demand equation for CRC (and hot-dipped galvanized) appears better than for HRC since CRC goes into consumer products such as automobiles and appliances which have seen stronger demand this year.

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Moreover, the lead times for CRC products are longer than for HRC products. But the main driver of this spread involves the high duty imposed on Chinese CRC since China accounted for more than half of CRC imports.

Should we expect prices to revert to their mean? Eventually yes. For the following two reasons:

Rising Imports

US steel imports hit one year high. Source: marketrealist
U.S. steel imports hit one year high. Source: Marketrealist.

The spread between domestic and international prices remains wider for CRC products. The arbitrage remains strong enough to justify shipping to the U.S. and enough holes exist in the anti-dumping duties to allow material to reach U.S. shores.

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Since early this year, U.S. steel imports have fallen sharply each month. However, the rate of decline last month was the lowest since April 2015. July steel imports rose 12% from June’s figures, reaching a 1-year high. Rising imports should help narrow the gap between HRC and CRC prices.

Domestic Arbitrage

HRC and CRC are just two different ways of making steel but, in both, the same raw material is used. Even in the case that imports stay stable, it would make sense for U.S. companies to make more of the form that is more profitable, eventually causing prices to revert to their mean.

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