by Raul de Frutos on DECEMBER 7, 2016
Our Raw Steels MMI rose 14% in November amid rising Chinese and raw material prices and a rebound in domestic prices.
Prices of flat steel products in the U.S. corrected since July but they finally showed some upside momentum in November. As we pointed out last month, there are reasons to believe domestic steel prices have found a floor and are set to rise as we move into 2017.
International Price Arbitrage Narrows: Imports Fall
Chinese demand from infrastructure and construction has been robust this year. So has its auto sector, a key industry for steel demand. Domestic prices fell over the past few months, but prices in China rose, trading now at their highest levels in two years. As a result, the international price arbitrage has come down to normal levels.
In some steel product categories,m like hot-rolled coil, this price arbitrage has narrowed enough that there isn’t much incentive for U.S. steel buyers to look for import offers. In October, The U.S. imported 2.4 million metric tons of steel, down 11% from the same period last year. Steel imports fell on a monthly basis for three consecutive months after they hit a one-year high in July. Fewer imports provide more pricing power to domestic steel producers in an otherwise well-supplied industry. While international steel prices continue to rise, domestic mills won’t find it difficult to find arguments for a price hike.
Industry Hopes After Trump’s Victory
What changes in the steel industry Donald Trump will make are still unknown. What’s clear is that the new president-elect made trade, manufacturing and the steel industry a cornerstone of his agenda. Stocks of American steel companies were the best performers in the stock market since the election as investors are optimistic that a Trump-led government will boost domestic infrastructure, which could be a boom for steel demand. In addition he has stated he would institute more measures to protect domestic steel producers.
A good benchmark for steel prices is the Dow Jones U.S. Steel Index, which tracks major steel producers around the globe. The index recently rose to the highest level in five years. Since the stocks of U.S. steel companies are linked to domestic steel prices, this powerful price increase hints at a big rebound in steel prices.
Rising input costs
Higher input costs help to keep supply in check as mills’ margins get squeezed. Thermal coal prices in China have more than doubled this year. Iron ore prices reached a two-year high in November, with prices trading near $80 a metric ton. This rising trend in input costs will help support the recent rally in steel prices.
Industrial Metals Boom
Finally, another reason to expect a rebound in steel prices is the ongoing price strength across the metal complex. We are witnessing powerful moves across the board. Even copper, a metal whose fundamentals didn’t look appealing, rose over 25% in a matter of days. The bullish sentiment across base metals is another reason to expect a continuation of this recent rebound in steel prices.