steel price

Coking coal has more than doubled in a matter of days as a cyclone caused disruptions to Australia’s coal exports. The impact was significant and several miners had to declare force majeure on their coal deliveries.

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It is estimated that shipments accounting for 50% of the global coking coal supply will be delayed and that Australia will need at least two months to regularize its coking coal exports after the natural disaster.

Australian coking coal’s free-on-board price in US dollars per metric ton. Source:mining.com.

Coking coal prices rose sharply in the second half of last year when China reduced allowable work days at the country’s coal mines, which reduced output and tightened the global coking coal market. These events added fuel to rising steel prices in China. But a slump in coking coal prices since December added pressure to steel prices, especially in China since the country strongly depends on the commodity to make steel.

Can Higher Coking Coal Prices Give a New Boost to Chinese Steel Prices?

The Chinese cold-rolled coil price. Source: MetalMiner IndX.

A recent CNBC article states that Australia is the world’s biggest coking coal exporter and therefore, China’s largest supplier. The recent disruptions are forcing China to look for alternative supplies such as Russia, Mongolia or Indonesia. In addition, China won’t import more coking from North Korea as a punishment to recent North Korean missile tests.

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Higher coking coal prices translate into higher input costs, particularly in China. Chinese steel prices set the floor for international steel prices, a topic that we discussed recently. Steel buyers should monitor the recent surge in coking coal prices closely since steelmakers will potentially pass on the increase to consumers, giving a boost to weakening steel prices in China.

U.S. automakers’ sales figures for March came in below market expectations and gave early evidence that America’s long boom cycle for automotive sales may finally be losing steam. Automakers sold 1.56 million new cars and trucks in March, a 1.6% decline compared with the same month a year ago.

Ford Motor Company took the biggest hit among sales drops, seeing its March numbers fall more than 7% from February’s.

Industry consultant Autodata put industry Seasonally Adjusted Annual Rate at 16.62 million cars, trucks and SUVs for March.

That was below the 17.3 million analysts polled by Reuters had expected, and the first time since August that the SAAR – a crucial industry metric – had fallen below 17 million.

General Motors had the best month, reporting a 2% increase in sales to just over 256,000 vehicles, with sales of its Tahoe and Suburban SUV models seeing their best sales month since 2008.

Sales at Ford Motor Co. fell the aforementioned 7+% to 236,000 vehicles, with fleet sales to rental agencies, businesses and government entities down nearly 17% on the year. Sales of Ford’s F-Series pickup trucks rose 10% but that simply could not offset the losses elsewhere. Sales at Fiat-Chrysler Automobiles fell 5% in March. Automotive sales in the U.S. risen since end of the 2008 recession and hit a record last year of 17.55 million last year. Toyota Motor Corp. and Honda Motor Co. reported smaller losses.

The fall in new car sales is even more curious considering that consumer confidence is at its highest level since 2000. Could the level of vehicle replacement that had driven sales since 2008 finally be falling? Vehicle inventories at dealerships have risen to the highest point since 2004, according to Edmunds.com.

If auto sales have, indeed, plateaued, then prices for automotive steel and aluminum could as well, at least in the expansive U.S. market. Our Automotive MMI remained flat this month at 88.

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US Cold-rolled coil prices since 2012. Source:MetalMiner IndX

U.S. Cold rolled-coil prices rose to their highest levels since March of 2012 this week. Spot steel prices saw some upward action in January, however, prices really came under pressure in early February.

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In March, U.S. steel mills are pushing for another round of price hikes. So far, they seem to be succeeding.

China Steel Prices

Hot-rolled coil price spread. Source: MetalMiner IndX

Back in November, we predicted a surge in steel prices as we moved into the new year. When international steel prices rise, U.S. mills can more easily justify a price hike. Chinese prices set the floor for international prices. Last summer, U.S. steel prices declined sharply while Chinese prices held well. That caused the international price arbitrage to come down to normal levels.

The price arbitrage started to widen again this year as momentum in U.S. steel prices picked up. However, the arbitrage is still relatively narrow compared to historical levels, especially in hot-rolled coil. Therefore, U.S. mills still have some room to hike prices. Still, for the rally to be sustained throughout the year, Chinese steel prices will need to keep rising.

Falling Chinese Steel Exports

In January, Chinese steel exports fell near 24% compared to the same month last year. In absolute terms, January steel exports were at their lowest level since June 2014. Exports fell by double digits in the last four months of 2016. While more countries act against the threat of a flood of Chinese steel, we could see further moderation in exports this year, which bodes well for global steel markets. What’s surprising is that exports have falling despite rising output.

According to the data released by the World Steel Association, China’s January steel production rose 7.4% to 67 mmt while global steel production rose 7% from a year ago. In addition, China’s operating steel capacity increased in 2016, since most of the announced cuts in capacity were already idle.

So far, solid demand in China has absorbed the increase in output, or at least most of it. The Caixin Manufacturing PMI in China rose to 51.7 in February, beating market expectations and marking the eighth-straight month of growth. In addition, there are rumors that China is stocking its excess steel production. According to SteelHome, hot-rolled coil and rebar inventories in China have surged so far this year.

All About Production Cuts

In conclusion, U.S. mills could continue to raise prices in the short-term. However, for a sustained bull market in steel prices, Chinese steel prices will have to rise as well. China’s domestic demand looks strong, but it won’t be enough to support a rising price trend in the face of rising output.

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Beijing “has ordered curbs on steel and aluminum output in as many as 28 northern cities during the winter heating season, as it steps up its fight against pollution,” according to Bloomberg, but we need to see if those cuts actually materialize this year. China will need to intensify its efforts to curtail excess steel capacity. Otherwise, if production continues to grow unabated, it could hamper this price recovery.

In the ongoing dispute between Japan and India over cheap steel imports, Japan has requested that the World Trade Organization set up a panel to resolve the dispute.

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Early indications are that the move will be opposed by India. Japan’s request comes after New Delhi imposed safeguard duties on several iron and steel products, which India claimed violated global trade rules.

India’s finance ministry imposed definitive safeguard duties on imports of hot-rolled flat products of non-alloy steel in coils to counter a surge in imports from several countries, including Japan. India’s stand has been that such cheap imports “caused injury to domestic steel industries.”

New Delhi would have taken recourse to the safeguard measures on grounds that the import surge in hot-rolled flat products is the result of unforeseen developments. India levied 20% safeguard duties ad valorem minus anti-dumping duties on Japanese imports of hot-rolled flat products between September 2015 and September 2016; 18% between September 2016 and March 2017; 15% between March 2017 and to expire by September 2017; and 10% for a future period in September 2017 and March 2018.

As reported by MetalMiner, despite the excellent trade relations between the two nations, Japan is unhappy with India’s decisions to place a minimum import price and other assorted duties to protect its domestic steel industry. Japan claims this has halved its steel exports to India in the last year.

Japan requested the panel came after India’s failure to provide “convincing reasons” for its safeguard and anti-dumping actions. It’s said the request will come up before the dispute settlement body (DSB) meeting today.

According to a report in the Financial Express, India opposes Japan’s move. Quoting experts, the report said since WTO cases can be settled with rulings that were “prospective,” any adverse judgment would not affect India significantly.

In a parallel development, there are reports coming in that India would use make it compulsory for Indian customers to use domestically produced steel, to stop inroads made by steel products from other countries including China.

India may soon mandate the use of local steel in government infrastructure projects worth billions of dollars, pitching it as a WTO-compliant protectionist measure.

Quoting news agency Reuters, the report said the Indian Government expects to move to boost sales of local companies such as JSW Steel and Tata Steel and eventually attract global steelmakers such as ArcelorMittal and POSCO to invest in the country.

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India is the world’s third-largest steel consumer, but its current level of capacity utilization by domestic steel producers is below 80%.

U.S. construction spending unexpectedly fell in January as the biggest drop in public outlays since 2002 offset gains in investment in private projects, pointing to moderate economic growth in the first quarter.

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The Commerce Department said on Wednesday that construction spending declined 1% to $1.18 trillion. Construction spending in December was revised to show a 0.1% increase rather than the previously reported 0.2% decline.

Economists polled by Reuters had forecast construction spending gaining 0.6% in January rather than the loss that was booked.

Construction MMI

Our Construction MMI held steady this month despite the falling spending. The component metals of the sub-index still have bulls behind them, despite the flat performance. Steel construction materials such as rebar and h-beams are still posting big gains but scrap and others saw a loss.

It’s almost as if construction products are still in demand, particularly in China’s construction sector, even as U.S. construction experiences a pullback.

In January, public construction spending in the U.S. tumbled 5%, the largest drop since March 2002. That followed a 1.4% decline in December. Public construction spending has now decreased for three straight months.

Outlays on state and local government construction projects dropped 4.8%, also the biggest drop since March 2002. This could be an ominous sign for construction spending this year, provided, of course, that a major infrastructure plan, such as the $1 trillion plan President Trump continues to promise, doesn’t pass quickly enough to boost construction prices. The longer that it takes to pass an infrastructure plan, the less likely it is to boost contractors’ bottom lines this year.

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That boost is needed for our aging infrastructure, too. Spending on state and local government construction projects has now dropped for three straight months. Federal government construction spending plummeted 7.4% in January, the largest decline since May 2014. The drop snapped three consecutive months of gains.

Spending on private construction projects actually rose 0.2% in January, but could not make up for the loses in government projects.

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February drew to a close with steel prices in the midst of a rally, following a slight reduction the week prior, with traders honing their focus on steel production cuts.

According to a recent piece from the Economic Calendar, Leia Toovey writes that China rebar futures grew 4% earlier in the week due to said cuts, but also due to seasonal demand.

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Citing a recent report from Reuters, Toovey added that steel producers in China have been tasked with scaling back production to reduce pollution in time for the start of the China’s National People’s Congress.

Toovey writes: “The cutback in production ahead of the Congress was anticipated, but it also brings back to the forefront the fact that the country is serious when it comes to reducing pollution. Previously, the country announced that it would crack down on industries that were heavy polluters in order to reduce emissions.”

A Cool February for Steel Prices

Our own Raul de Frutos wrote of the cool down in steel prices for February. He maintains that the slow down was just temporary and that, raw material prices, in addition to other factors are in full support of the ongoing steel price rally.

De Frutos concluded: “Steel prices have increased for three-consecutive months. The right time to buy steel was in November, now prices might need some time to digest last year’s gains. Steel buyers need to keep a close eye on China’s production, President Trump’s new policies and raw material price trends in order to identify new opportunities to buy steel in 2017.”

How will steel and base metals fare in 2017? You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

Steel prices have been on a tear since November. However, prices came under pressure in early February.

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After having lost some ground over the past month, U.S. steel companies now seem to be pushing for another round of price hikes. But, can U.S. steel prices rise from current levels?

Production Rises

In February, new findings by Greenpeace East Asia and Chinese consultancy Custeel stated that despite China’s high-profile efforts to tackle overcapacity, China’s operating steel capacity increased in 2016, according to Reuters. The report “suggests that 73% of the announced cuts in capacity were already idle — in other words the plants were not operating. Only 23 million metric tons of cut capacity involved shutting down production plants that were operating,” according to the Washington Post. For 2016, China saw a net increase of 37 mmt of operating capacity, according to the Greenpeace East Asia/Custeel report.

Raw Steels MMI

According to data released by the World Steel Association, China’s January steel production rose 7.4% to 67 mmt while global steel production rose 7% from a year ago.

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Automakers sold 1.33 million vehicles in the U.S. in February, down 1.1% from the same month a year ago, as consumers continued to shift away from buying cars in favor of trucks and SUVs.

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Our Automotive MMI fell 4.3% as well, due in part to a pull back this month in steel prices, particularly the hot-dipped galvanized variety. There’s been plenty of analysis on our site about whether the steel price fall is merely a pause in an overall up trend or a sign of deeper issues in the individual North American product markets.

Automotive MMI

If major automotive products such as cold-rolled coil and HDG are, indeed, being squeezed then prices could increase quickly in the coming months as mills take advantage of short supply, even if more capacity comes online later in the year.

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The other products that make up the index are still firmly in bull market territory with copper leading the way.

The other major automotive consumer market that creates supplier demand is China’s, the world’s largest automotive market. It saw auto sales decline by 1.1% year-on-year in January to 2.2 million units. Total vehicle sales, including trucks and buses, however, came in 0.2% higher year-on-year to 2.5 million units. Some of these numbers could be affected by the Lunar New Year holiday. China is also entering the planned final year of a major government automotive purchase rebate which could affect sales as the incentive winds down.

Actual Automotive Metal Prices

U.S. Hot-dipped galvanized steel fell 1.5% from $841 a short ton in February to $828/st this month. U.S. Platinum bars increased 2.92% from $993 an ounce in February to $1,022 an ounce this month. Primary three-month LME copper increased .08% from $5,930 per metric ton in February to $5.935/mt this month.

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U.S. Customs and Border Protection said recently that it plans to start awarding contracts by mid-April for President Donald Trump’s proposed border wall with Mexico, signalling that he is aggressively pursuing plans to erect “a great wall” along the 2,000-mile border.

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The agency said it will request bids on or around March 6 and that companies would have to submit “concept papers” to design and build prototypes by March 10, according to FedBizOpps.gov, a procurement website for federal contractors. The field of candidates will be narrowed by March 20, and finalists must submit offers with their proposed costs by March 24.

Can I Get a Good Deal on a Wall?

The president told the Conservative Political Action Conference on Friday that construction will start “very soon” and is “way, way, way ahead of schedule.”

Homeland Security Secretary John Kelly has sought employees’ opinions during border tours of California, Arizona and Texas but it’s still unclear how Congress would provide funding, how much it would cost and when, exactly, construction could start.

The Government Accountability Office estimated it would cost on average $6.5 million a mile for a fence to keep out people who try to enter on foot and $1.8 million a mile for vehicle barriers. There are currently 354 miles of pedestrian fencing and 300 miles of vehicle barriers, much of it built during President George W. Bush’s second term.

U.S.-Mexico border wall in Arizona.

A section of an existing US-Mexico metal border wall in Arizona. Source: Adobe Stock/Yukon Charlie.

Republican leaders in Congress have said Trump’s wall would cost between $12 billion and $15 billion. Trump has suggested $12 billion. An internal Homeland Security report prepared for Kelly estimated the cost of extending the wall along the entire U.S.—Mexico border at about $21 billion. Read more

The operating cost of rolling cold-rolled coil from hot-rolled coil is around $30-50 per metric ton depending on how efficient the steel mill is. Internal (or external) logistics cost to shift the coil between the HRC mill and a CRC mill could be as much as $40/mt but a single-site mill won’t have that cost.

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Add in capital costs that are amortized over the mill life of up to $15/mt and it is no surprise that the long-term price of CRC has been around $100/mt above the price of HRC.

Right now, spot HRC prices are a minimum of $820/mt while HRC is $620/mt. That is a spread of $200/mt.

That makes CRC one of the most profitable products in the steel industry. Why is that the case?

Spread of CRC over HRC ($ per metric ton)

Source: Steel-Insight

First of all, we need to look at the way that the U.S. steel industry is structured and realize that CRC is a niche. Read more