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A Closer Look at Steel Companies' 1Q16 Earnings and Future Plans

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Part 4
A Closer Look at Steel Companies' 1Q16 Earnings and Future Plans PART 4 OF 10

Why Steel Companies’ Average Selling Prices Could Improve in 2Q16

What’s to come in 2Q16?

In the previous article, we saw that steel companies reported lower steel selling prices in 1Q16. Average selling prices fell not only on a year-over-year (or YoY) basis but also compared to 4Q15. This might sound counterintuitive, as spot steel prices have risen sharply in 1Q16.

In this article, we’ll explore why US (DIA) steel companies reported lower average steel selling prices in 1Q16. We’ll also see if 2Q16 will be any better.

Why Steel Companies&#8217; Average Selling Prices Could Improve in 2Q16

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Spot prices

Spot steel prices started to gain traction only toward the end of 1Q16. As a result, we haven’t seen the full impact of higher spot prices in steel companies’ 1Q16 average selling prices.

Also, initially, the uptrend in steel prices was largely limited to flat-rolled steel products. However, long product prices have also strengthened in the last month. The benchmark rebar contract has risen more than 18% since March.

Companies with high rebar exposure, including Nucor (NUE), Gerdau (GGB), and Commercial Metals Company (CMC), would benefit from higher rebar prices.

Contract sales

Note that steel companies sell their products on spot steel prices or under long-term supply agreements. In its Flat-Rolled segment, U.S. Steel Corporation (X) sells almost 75% of its produce on contract pricing. AK Steel (AKS) has one of the highest percentages of contract sales in its sales mix.

A lot of these contracts rolled over at the beginning of the year when spot steel prices were depressed. However, as some of these contracts reset throughout the year, we could see some positive impact on steelmakers’ average steel selling prices.

In the next part of the series, we’ll look at steel companies’ 1Q16 earnings before interest, tax, depreciation, and amortization.

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