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The primary reason to pay attention to Chinese steel prices pertains to the country’s price leadership in the global marketplace.
However, since currency dynamics shifted recently, now is a good time to take a more tactical look at the U.S.-China steel price spread.
The price spread between U.S. and Chinese steel increased during the months following the March 2018 implementation of tariffs on steel imports into the U.S.
After peaking around June 2018, the price spread between U.S. and Chinese steel commodity prices then shrank again by July 2019 — to its lowest level since December 2017 — largely due to falling U.S. prices.
The spread for CRC looks similar, but at different dollar amounts.
As shown on the chart of the spread below, for HRC, the spread between prices narrowed significantly several times in recent history, but came closest to approaching zero in December 2017 and then again in January of 2019.
A smaller spread benefits U.S.-based producers, since similar prices disincentivize imports.
Once accounting for additional costs associated with shipping, finance, the cost of carry and margin, any time the spread exceeds around $90/st — meaning U.S. costs exceed Chinese steel costs by a minimum of $90/st — imports start to look attractive, all other things being equal.
With tariffs, this cost should theoretically provide a buffer against import competition for U.S. producers to the extent of the tariff cost, plus the original competitor’s price, shipping and related costs associated with imports.
For example, assume a tariff rate of 25% on a China HRC price of $485/st and a U.S. price of $585/st. With import freight plus costs at an estimated $90/st, the tariff adds an additional cost of $143.75/st, with an end price total of $718.75/st.
In this example, at this price point and tariff rate, we would need to see the price spread exceed $233.75/st (cost of importing, plus costs of tariffs) before imports theoretically make sense, as shown by the purple line in the chart above.
For CRC, the red line in the chart below indicates where a $90/st import charge intersects the spread line.
For a short time during the start of the tariffs, U.S. producer prices surged; therefore, producers may not have actually allowed the tariffs to render protection as intended by their use, per the HRC model shown above.
U.S. producer prices look to have already corrected from the aforementioned price surge.
Looking at the chart above, CRC imports should be more heavily impacted by the imposition of tariffs, since imports make more sense from a price perspective.
Instead of seeing tariffs as providing a buffer allowing higher prices, what seems closer to reality has more to do with China’s need to lower prices. With U.S. prices corrected, we expect to see lower Chinese prices, as producers drop prices to stay competitive.
In fact, recently we did see lower Chinese HRC prices and a fairly weak, but still sideways, domestic CRC price. Weaker demand in China is a key factor underpinning the price weakness.
Since June, as shown in the chart above, the domestic price of HRC steel in China trended lower, but just slightly (note the narrow range shown on the vertical axis).
In early August, the Chinese government allowed the currency to weaken to a 7-to-1 level vis-a-vis the yuan versus the dollar. This effectively dropped the price of Chinese steel for international buyers and the amount of the related percentage-based tariff.
Compared to HRC, China’s domestic CRC price trend has looked more firmly sideways since June 2019.
In the case of CRC, we can see more clearly in the chart below how the adjusted exchange rate impacts the international price of Chinese CRC steel exports, as the domestic price has nudged up overall since June.
What This Means for Industrial Buyers
Chinese producer prices looked flat to weak during the summer months and into the fall, as the exchange rate adjustment made steel imports from China look more attractive.
Given the high levels of production from China, generally speaking, we can expect to see the highly competitive price environment to continue, providing industrial buyers with ample options for negotiations.