Raw Steels MMI Falls: How Will Steel Prices Look in the Next Two Months?

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Our Raw Steels MMI fell seven points* due to the slump in China’s steel prices in April.

Raw Steels MMI

(*Note: We changed one of the data elements of our index to map the underlying market more effectively. That change contributed to a lower number this month.)

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Since their peak in February, China’s steel prices have fallen by more than 20%, while U.S. prices have continued to climb. But guess what, things changed towards the end of April. Prices in China started to recover (see how we predicted that) while U.S. prices fell (yes, we predicted that too). In this post, I’ll analyze what this price divergence means and how you — assuming you buy or invest in steel — can take advantage of it.

China HRC price. Source:MetalMiner IndX

U.S. steel prices will fall in May or June

If you read MetalMiner, you might remember what happened last time prices in the U.S. became quite high compared to China’s prices. If you don’t remember, let me remind you: U.S. steel prices fell.

U.S. CRC prices fall when international price spread is too high. Source: Raul de Frutos analysis of MetalMIner IndX

Why does this happen? Well, even though the U.S. doesn’t import steel directly from China, Chinese steel prices set the floor for international prices. Therefore, when China’s steel prices fall, imports become cheaper.

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When the U.S.-China price arbitrage widens, some U.S. companies will buy foreign steel. As a result, demand for domestic steel products will fall, and U.S. mills will lose purchasing power. U.S. mills have no other option than to decrease their spot prices to stay competitive against imports. Consequently, U.S. steel prices will fall, until this price arbitrage narrows to normal levels.

What This Means For Metal Buyers

If you have the ability to source from international suppliers, this is the time. Take advantage of the international price arbitrage. U.S. steel prices are too high relative to international prices. If you only source U.S. material, over the next two months you are going to get cheaper quotes for your steel, but don’t get too pumped about it because prices in China might be recovering. That will narrow the international price arbitrage, limiting the downside in U.S. steel prices. Over the next two months, U.S. steel prices will likely fall, but it won’t take too long before they bounce back up. That is, if China’s steel prices continue to climb.

Actual Steel Prices

The Chinese slab declined 20% to 403 CNY per mt while U.S. shredded scrap fell 7% to finish the month at $298 per mt. HRC prices in China fell 6% to 457 CNY per mt from 486 CNY a month ago.

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