Before we head into the weekend, let’s take a look back at the week that was and some of the headlining stories here on MetalMiner: Need buying strategies for steel? Try two free months of MetalMiner’s Outlook How did the rest of the world react to President Donald Trump’s initial announcement last week about steel […]
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. Need buying strategies for steel? Try two free months of MetalMiner’s Outlook
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.
[caption id="attachment_90758" align="aligncenter" width="580"] Source: MetalMiner data from MetalMiner IndX(™)[/caption]
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.
[caption id="attachment_90759" align="aligncenter" width="580"] Source: MetalMiner data from MetalMiner IndX(™)[/caption]
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 Spread
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.
[caption id="attachment_90760" align="aligncenter" width="580"] Source: MetalMiner data from MetalMiner IndX(™)[/caption]
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. MetalMiner’s Annual Outlook provides 2018 buying strategies for carbon steel Actual Raw Steel Prices and Trends
[caption id="attachment_88708" align="alignleft" width="300"] Chris Titze Imaging/Adobe Stock[/caption]
The Renewables MMI (Monthly Metals Index), after a significant surge last month, sat at 100 for the second consecutive month. Need buying strategies for steel? Try two free months of MetalMiner’s Outlook
Within this basket of metals, the Japanese steel plate price rose, as did the price of Chinese and American steel plate. U.S. steel plate, in fact, rose 5.5% month over month.
U.S. grain-oriented electrical steel (GOES) coil also jumped in price.
As for the trio of rare and minor metals in this MMI, cobalt cathodes fell 1.1%, while silicon dropped slightly and neodymium made a small gain.
Cobalt Costs
According to a report by the Financial Times, changes to the mining code in the Democratic Republic of Congo will lead to higher costs for consumers of the metal.
According to the report, President Joseph Kabila on Wednesday said he would sign a new order after meeting with representatives from some of the big miners with business in the country, including Glencore, Molybdenum and Ivanhoe Mines.
Cobalt is used in batteries for electric vehicles (EVs), among other things, making it an especially prized material as EVs gain popularity. As such, with a majority of the world’s cobalt being mined in the DRC, political machinations in the country have a significant impact on the metal’s price.
According to the Financial Times, the code could see royalties on cobalt — plus other metals, like copper and gold — rise from 2% to 10%.
Senators Lobby for Electrical Steel Protection in 232
The Journal-News reported on a trio of U.S. senators who lobbied Trump to prioritize electrical steel in the Section 232 trade remedy process.
The only remaining maker of electrical steel in the country, AK Steel, was unlikely to benefit from the Section 232 trade remedy proposal, according to Sen. Rob Portman (R-OH).
“We write you today to share our concerns that your proposed section 232 remedy is incomplete when it comes to electrical steel,” Portman and two other senators said in their letter to Trump, according to the Journal-News. “We write on behalf of a constituent company, AK Steel, which is the last domestic producer of grain-oriented electrical steel (GOES). Since the remedy, as currently constructed, does not include electrical cores and core parts, the remedy will not be effective for the domestic electrical steel market.”
In the senators’ letter, they requested the president add a trio of HTS codes to the duty order.
The Construction MMI (Monthly Metals Index) dropped one point this month, falling to 93 for our March reading. Need buying strategies for steel? Try two free months of MetalMiner’s Outlook
Within the basket of metals for the Construction MMI, Chinese rebar and H-beam steel prices dropped on the month. Meanwhile, U.S. shredded scrap steel rose 8.4% on the month, while European commercial 1050 sheet fell 3.0%.
Chinese aluminum bar also fell, dropping 1.0% month over month.
U.S. Construction Spending
According to U.S. Census Bureau data for January, total spending stood pat from December, but was up year over year.
Construction spending during January 2018 was estimated at a seasonally adjusted annual rate of $1,262.8 billion, up minimally from the revised December estimate of $1,262.7 billion, according to the Census Bureau.
The January figure, however, was up 3.2% from January 2017’s $1,223.5 billion.
Meanwhile, spending on private construction was at a seasonally adjusted annual rate of $962.7 billion, 0.5% above the revised December estimate of $967.9 billion.
Under the umbrella of private construction, residential construction was at a seasonally adjusted annual rate of $523.2 billion in January, 0.3% above the revised December estimate of $521.8 billion. Nonresidential construction was at a seasonally adjusted annual rate of $439.6 billion in January, 1.5% below the revised December estimate of $446.2 billion.
As for public construction, the estimated seasonally adjusted annual rate of public construction spending was $300.1 billion, 1.8% above the revised December estimate of $294.8 billion.
Within that, educational construction was at a seasonally adjusted annual rate of $76.7 billion, 2.1% above the revised December estimate of $75.2 billion. Highway construction was at a seasonally adjusted annual rate of $92.6 billion, 4.4% above the revised December estimate of $88.8 billion.
Construction and Tariffs
Just like other metal-using sectors, the construction industry would also be impacted by President Trump’s announced steel and aluminum tariffs (especially steel).
Trump’s announcement came just over a month after Trump proposed $1.4 trillion in infrastructure investment over 10 years.
For a construction industry that saw spending flatten in January, a rise in materials costs would not be great news, should the tariffs become the law of the land.
According to Philip Gibbs, an analyst at KeyBanc Capital, the tariffs might give steel stocks a short-term “sugar high,” he told Reuters, but that unsustainable pricing could eat into demand from manufacturers.
The National Association of Homebuilders (NAHB) came out against the tariffs proposal, with the association’s chairman saying the tariffs would hurt consumers and make housing less affordable.
“It is unfortunate that President Trump has decided to impose tariffs of 25 percent on steel imports and 10 percent on aluminum imports,” said Randy Noel, chairman of the NAHB. “These tariffs will translate into higher costs for consumers and U.S. businesses that use these products, including home builders.
“Given that home builders are already grappling with 20 percent tariffs on Canadian softwood lumber and that the price of lumber and other key building materials are near record highs, this announcement by the president could not have come at a worse time.”
Of course, the metals world is still in wait-and-see mode regarding the tariffs, which have yet to become actual law.
The Copper MMI (Monthly Metals Index) traded lower this month, falling two points to 87 for our March reading.
The Copper MMI fell for the second consecutive month, after the sharp increase in prices at the end of last year. In February, LME copper prices fell by 3.5%. Need buying strategies for steel in 2018? MetalMiner’s Annual Outlook has what you need
The LME copper short-term downtrend does not seem that bearish when looking at the two-year chart. Copper prices retraced this month again, but still hold above the blue dotted line, which represents the trend line (prices below that line might indicate a change in trend). In December, copper prices skyrocketed and breached the $7,000/st level, confirming long-term bullish sentiment remains intact.
[caption id="attachment_90695" align="aligncenter" width="580"] Source: MetalMiner analysis of FastMarkets[/caption]
Meanwhile, this month, a stronger U.S. dollar added downward pressure to commodities and industrial metals. Analysts also claim the latest “bearish” downtrend occurred due to increasing LME stocks.
MetalMiner analyzes copper supply from two different perspectives: copper stocks and global copper supply. Copper Stocks
Copper stocks at the major metal exchanges totaled 537,722 tons at the end of November 2017, reflecting a decrease of 0.3% from stocks in December 2016. In particular, LME stocks fell by 41%, while SHFE stocks increased by 12% in 2017.
However, 2018 has come with some recoveries for LME copper stocks.
Copper stocks are at a current 324,900 tons. This means LME copper stocks are 13,075 tons higher than at the beginning of 2017, and 85,500 tons higher than at the beginning of 2016.These numbers show some recovery for LME copper stocks; this information has likely fueled trading sentiment this month.
CME stocks also increased at the beginning of the year. In 2015, CME stocks were just at 20,000 tons, compared to the current 209,000-ton level. Both of these numbers (CME and LME stock levels) have moved trader sentiment. Global Copper Supply
The Indonesian unit of Freeport-McMoran’s copper mine and Amman Mineral Nusa Tenggara (AMNT) are waiting for last-minute ministry approvals to their application for an extension to continue with copper concentrate exports. Freeport’s export order for the Grasberg mine expires this month (copper mines have to reapply for export licenses every year).
Freeport had an export quota of 1.1 million tons of copper ore concentrate ending February 2018. Exports could stop this month, but mine production could continue.
Meanwhile, the Chinese Ministry of Environmental Protection has tightened the “allowable” impurities levels further. Therefore, instead of importing scrap, China now imports unwrought copper for downstream production.
Copper supply also looks threatened in Chile and Peru, particularly if workers go on strike since labor contracts expire soon. The powerful labor union at the Escondida copper mine cast doubt on the chances of starting talks on a new labor agreement with the company before formal negotiations commence in June.
Global copper supply still shows some uncertainty with possible copper supply shortages coming in 2018. Therefore, buying organizations may want to understand the global picture rather than just considering the trend based on stock levels and actual copper supply. What This Means for Industrial Buyers
In February, buying organizations had some opportunities to buy some volume. As long as copper prices remain bullish, buying organizations may want to buy on the dips. For those who want to understand how to reduce risks, take a free trial now to the MetalMiner Monthly Outlook. MetalMiner’s Annual Outlook provides 2018 buying strategies for carbon steel Actual Copper Prices and Trends
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