Our Raw Steels MMI rose 8% in January. Flat products achieved or came close to multiyear highs across the sub-index. In this post we will lay out some of the factors driving this price rally. A rally that we predicted three months ago.
Rising International Steel Spreads
In late January, President Donald Trump took executive action and approved to move forward the Keystone XL and Dakota Access oil pipelines.This will significantly increase U.S. steel demand from the energy sector.
The new president also issued another executive order that required them, and all pipeline projects, to use only American-made steel. There is no language in Trump’s memo that indicates any waivers for American-made steel would exist for trade-agreement countries. If this policy is adopted, for at least the next four years even by only the executive branch, it is, by far, the most stringent definition of “American-made” we have seen in federal steel procurement.
With the expected increase in U.S. demand for steel and new “Buy American Steel” policies, the spread between U.S. and international prices could widen this year. Spreads bottomed at the end of November and it looks like there have room to rise again.
Strong Chinese Steel Prices
But if China succeeds in shutting down the production of low-quality steel by the end of June, that will also cause prices to rise in China.
Coal burning is the biggest contributor to air pollution in China. One of the principal users of coal, and therefore most polluting, is its steel industry. This is another reason to believe Beijing will strengthen its supply-side reforms this year.
Meanwhile, demand indicators from China, by far the largest consumer of steel, continue to look strong. This combination of lower-than-expected supply and stronger-than-expected demand has translated into rising steel prices in China, which continue to look strong. In addition, iron ore prices have held above $80 per mt. Chinese steel mills of course require seaborne iron ore supply.
Falling China Steel Exports
Chinese steel exports have fallen in double digits for four consecutive months. The double-whammy of the E.U. slapping anti-dumping duties on some Chinese steel products combined with India’s ‘minimum import price’ have led to the decline. The U.S., no slouch when it comes to anti-dumping and countervailing duties on Chinese steel already, now favors a more aggressive trade policy, regularly citing job losses as a result of imports from foreign countries, especially China.
We might expect to see further declines in Chinese steel exports and countries take defensive action against cheap imports. This would create a global price lift.
Actual Steel Prices
The Chinese slab price rose 9% to 488 CNY per mt while US shredded scrap rose 5% to finish the month at $301 a mt. HRC prices in China fell 6% to 519 CNY per mt from 554 CNY a month ago. China coking coal prices rose 15%.