The Raw Steels MMI (Monthly Metals Index) increased 7% this month, reaching 92 points. This reading is the highest since June 2012. The skyrocketing MMI came as a result of sharp increases in steel prices, the Section 232 release and President Trump’s comments regarding imposition of a 25% steel tariff.
Steel price momentum strengthened in February, moving sharply up for all forms of steel. Steel prices have reached more than three-year highs. However, some forms of steel are now even higher. Domestic HRC prices, currently at $762/st, haven’t seen these levels since June 2011.
Based on the long-term analysis, steel prices will likely continue to rise this year. Even if the seasonality for steel prices returns in Q2, steel price momentum appears strong.
Let’s Talk Spreads
Section 232 — and the price uncertainty it has unleashed — requires metal-buying organizations to pay more attention to what is called the spread. The spread refers to the price delta between domestic HRC and CRC prices and the spread of each with Chinese prices. Analyzing and understanding these spreads helps to determine by how much mills could increase steel prices (as well as how high they can go).
So, let’s take a look at some examples.
The Domestic HRC-CRC Spread
As with all the other forms of steel, CRC prices also increased again this month. The upward movement remains strong, even if the amount of the increases — and therefore the slope of the upward trend — appears softer (less sharp).
This does not come as a surprise, as the spread between CRC and HRC prices was extremely high. Now, the spread between CRC and HRC prices has returned closer to historical levels.
It is important to understand where the spread comes from. CRC (cold rolled coil) is HRC (hot rolled coil) plus one additional rolling process. As per the chart above, from 2011 to 2016 the price spread between the two has been around $100/st (plus or minus).
At the end of 2016, buying organizations could see a $201/st spread between HRC and CRC prices. The spread started to decline at the beginning of 2017, and has increased further in 2018. The domestic spread is currently at $124/st, much closer to its historical levels. (MetalMiner covered domestic spreads in our free Annual Outlook Report published in October 2017.)
A higher spread creates better margins for domestic mills. From a buying perspective, the previous anomaly only helps a buying organization that has not contracted for all of its CRC purchases (and can play a price arbitrage game by purchasing HRC and paying to roll it to CRC).
Chinese demand has always been positioned as one of the main drivers of global steel prices. Check out the correlation in the graph below between the domestic HRC and Chinese HRC prices. When Chinese prices increase, U.S. domestic prices tend to increase, too. The same is usually true when prices fall.
Even if short-term events (such as the release of the Section 232 report or President Trump’s comments) add support to steel prices in one country, the general trends tend to correlate.
This is exactly what happened with U.S. HRC prices.
The latest increase in HRC prices here in the U.S. came as a result of the Section 232 uncertainty and the announcement of the tariff. Not surprisingly, so far this month, HRC prices in China increased after trading sideways last month. Therefore, watching price reactions in China makes sense in order to better forecast price trends in the U.S.
An analysis of the spread between Chinese and U.S. prices allows buying organizations to better understand the price impacts the tariffs could have on domestic steel prices. In other words, the spread tells us how much domestic prices could rise before it is better to import steel from China.
What This Means for Industrial Buyers
The strong upward momentum for steel, together with the Section 232 outcome and President Trump’s comments regarding steel tariffs, drove steel prices to more than three-year highs. Buying organizations who have concerns about the Section 232 impact on the steel industry may want to read our Section 232 Report.
Actual Raw Steel Prices and Trends
The U.S. Midwest HRC 3-month futures price increased again this month by 20%, reaching $848/st. Chinese steel billet prices decreased by 1.1%, while Chinese slab prices increased by 5.4% up to $622/mt. The U.S.shredded scrap price closed the month at $350/st, increasing by 8.4% month over month.