Raw Steels MMI Mixed But Flat Products Surge

by Raul de Frutos on JANUARY 10, 2017

Our Raw Steels MMI fell by two points, dragged down by a sharp drop in coking coal prices. Chinese coking coal prices have been quite volatile over the past few months. But despite the recent decline, prices are still well above last year’s levels.

On the bullish side, we saw a big increase in steel flat product prices, both domestically and internationally.

Hot-rolled coil and cold-rolled coil prices in the U.S. have risen 13% and 17% respectively since they hit bottom in mid-November.

Additionally, steel prices in China continued to climb in December. We already noted, that one of the reasons to expect higher steel prices in the U.S. was rising Chinese prices. Prices in China set the floor for international prices and the spread between U.S. and international steel prices has narrowed so much in some steel product categories, like HRC, that there isn’t much incentive for domestic steel buyers to look for import offers.

While prices in China have risen, Chinese steel exports have fallen, suggesting that the country is absorbing more steel. In November, Chinese steel exports fell 16% compared to last year. For the first eleven months, exports are down 1% compared to the corresponding period in 2015.

The real estate sector is among the world’s largest steel consumers. Total investment in real estate in China during the first eleven months of 2016 rose 6.5% compared to the same period of last year. China’s passenger car sales rose 17.2% compared to the same month last year and it’s the seventh consecutive month were car sales rise in the double digits.

China’s Steel Supply to Fall In 2017

While China’s better-than-expected demand was a key driver to higher steel prices in 2016, we believe that China’s supply might be the key to higher steel prices in 2017.

For years, Chinese cities have been choking on the smog spewing from China’s industrial production sector, but things have gotten much worse lately. In December, authorities asked 23 cities in northern China to issue red alerts as inspection teams scoured the country. The scale of the red alert measures shows that the Chinese government is taking air pollution seriously this time.

China’s energy consumption is mostly driven by its industry sector, the majority of which comes from coal consumption. Coal burning is the biggest contributor to air pollution in China. One of the principal users of coal, and therefore most polluting, is its steel industry.

China has previously applied stricter anti-pollution rules and supply-side reforms designed to cut capacity in the coal and steel sectors, which helped push prices up. Now that the situation is getting unbearable for citizens, China has no choice but to get tough in its self-declared “war on pollution.” The result is that we could see significant supply disruptions in China’s metal production sector, particularly in steel.

What This Means For Metal Buyers

The expected boost in infrastructure spending in US will help support steel prices. However, the main driver to steel prices continues to be China. In 2017, steels buyers need to monitor if China is able to spur demand growth rates and whether its steel supply falls amid pollution issues.