Our Raw Steels MMI fell 7% to 53 points last month. This is the first time we have seen a significant decline in steel prices this year. August brought some interesting developments for the steel industry.
By the end of the first half, domestic hot-rolled coil prices had risen 70% while prices in China were up by just 30%. The main driver of this price gap was trade cases, which made U.S. steel imports plunge this year, inflating prices domestically.
But, the arbitrage between U.S. and international prices might be already narrowing. While U.S. prices fell in August, Chinese prices rose. What explains this divergence in August? Perhaps, imports are starting to pick up?
The arbitrage between domestic and international prices 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.
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 one-year high. Rising imports should help narrow the gap between domestic and international prices going forward.
CRC-HRC Spread Rises to Record Levels
In July, we saw a sharp increase in flat steel imports, especially HRC imports, which rose 48% compared to June. Meanwhile cold-rolled coil imports rose 7% compared to June. As HRC imports increased more than CRC imports, HRC prices fell more than CRC in August, widening the unprecedented price gap that we are witnessing between these two.
The main driver of this spread involves the high duty imposed on Chinese CRC since China accounted for more than half of CRC imports. Also. 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.
Will prices revert to their mean?
We believe that eventually they will. 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.
What This Mean For Metal Buyers
US Steel prices are falling after scoring big gains this year. Steel buyers might want to hold off on their purchases until we see some price stabilization.
Actual Steel Prices
The Chinese slab price rose 6% to 400 CNY per mt. US shredded scrap fell 2% to finish the month at $238 a mt. Chinese HRC rose 3% to 425 CNY per mt from 411 CNY a month ago. The U.S. HRC futures contract declined 6% to $530 per mt.