Steel Spreads: Is US Cold-Rolled Coil a Ripoff Right Now?

by James May on FEBRUARY 28, 2017

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.

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?

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.

Back of the envelope analysis. U.S. HRC output is around 50 million. Around 20 mmt is sold as HRC and 30 mmt is made into CRC. Beyond that, around 12 mmt of that is sold as CRC and 18 mt is coated into HDG or tinplate. Bottom line – domestic supply is around 12 mmt. On top of that in 2014, there were 2 mmt of imports of CRC So total supply was 14 mmt.

Now the biggest market for that CRC is automotive – probably around 35%. That is mainly contract business. The second biggest market is appliance – once again contract business. Throw in some other contract markets and realistically that is 60% of the market. That is all domestic mill business. Of that 14 mmt therefore, the spot market is less than 6 mmt.

Now in 2015, imports of CRC from India and China (and four other countries) were essentially excluded. These totalled just over 1 mmt.

In addition, some non-auto domestic suppliers — notably CSN Steel — lost their HRC supply as they were importing HRC to re-roll and sell domestically.

Finally, the big contract businesses — auto and appliance — were doing very well and U.S .mills preferred to sell to those customers rather than sell spot. Shipments of CRC to the auto industry are probably up 10-12% over the last two years, for example, based on increased production alone.

So in conclusion, the supply of CRC to the spot merchant market (mainly distributors) has been squeezed. It is an enormous benefit to mills to maintain this squeeze as their contract prices for CRC and HDG are typically based on the spot market (as defined by the CRU index). Thus, they have been quite careful in their supply management.

Can it last?

Well, no. Imports are turning up from alternative suppliers. Vietnam, Turkey, Australia and a host of other suppliers are selling to the U.S. market as they too want to share in this enormously profitable trade. So supply is returning. Efforts to classify this as evasion are unlikely to be successful.

Moreover, domestic supply will increase. Domestic shipments of CRC were up 8.3% in 2016 and not all of that went to contract business. Big River Steel is adding capacity this year. Acero Junction is adding HRC capacity and that could make it easier for CR re-rollers to secure HRC (CSN is less than 100 miles from Acero Junction).

But the mills might be able to hold it for another few months, as the pent-up demand is still there and lead times remain a solid 7-8 weeks for CRC. Our guess is that the spread will come in over the second half of the year as the whole steel complex turns down.

Steel-Insight is a steel industry price-forecasting publishing company, based in Toronto. James May, the firm’s managing director, has been a steel industry analyst for 15 years and advises some of the major global steel trading companies, steel producers and steel consumers on the outlook for steel pricing and industry trends. For more information, visit www.steel-insight.com.