by Raul de Frutos on JANUARY 16, 2017

The price you pay for your steel pretty much depends on two things:

1. Prices in China, since they set the floor for international steel prices.
2. How much of a premium U.S. mills are able to justify over that price.

Graphic: Raul de Frutos/MetalMiner.

Prices in China are moved by supply and demand dynamics. We’ve explained in previous posts that overall, things are setting up for Chinese prices to continue to trend higher. While demand has been better than expected, China met its 2016 capacity cuts goal and further cuts are expected to take place this year as the country tackles its pollution issues.

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However, in this post we’ll focus on the premium that U.S. customers pay. This price spread between U.S. and international prices is also very important and could make your purchases more expensive in the coming months.

Spread HRC US – HRC China. Source: MetalMiner IndX.

Spreads have fallen sharply over the past few months. The spread between U.S. and Chinese hot-rolled coil (HRC) prices is now $97/ton. To put this in context, consider that this spread was $276/ton just seven months ago.

This means that just by justifying higher premiums, HRC prices could go from $600 to over $750. Spreads already started to rise last month. Will steel companies have the pricing power to raise their selling prices as they did last summer? There are reasons to believe they at least have a little room for a price increase:

Imports

When U.S. buyers have access to foreign steel, U.S. steelmakers lose pricing power. Trade cases last year gave U.S. steel mills the ability to increase their spot prices significantly. The soon-to-be President, Donald Trump, favors a more aggressive trade policy, regularly citing job losses as a result of imports from foreign countries, especially China.

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Markets expect Trump’s tough trade policies to contain steel imports. If imports stay under control, steel companies will have more pricing power, leading to a further expansion of spreads between U.S. and international prices.

Low Inventories

Source: MSCI, Steel-Insight

In 2015, steel end buyers and service centers went about destocking their inventory. The service center inventory destocking activity continued into 2016 as well. Inventory levels have come down. In addition, the proposed U.S. boost in infrastructure spending should cause domestic demand to increase. This combination of low inventory levels and expectation of higher real demand will likely make service centers buy more steel, giving U.S. mills more purchasing power to increase spot prices.