Why falling raw material prices fail to cheer steel producers

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Falling raw material prices

Previously, we saw how steel companies—like ArcelorMittal (MT) and U.S. Steel Corp. (X)—acquired mining assets. The companies acquired these assets because they anticipated that iron ore prices would increase. This would allow them to save on their raw material costs.

This would have been a strategic advantage for these companies—compared to their peers. However, iron ore prices started falling. This put the companies at a competitive disadvantage.

iron ore prices

Mining operations impact profits

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The previous chart shows the fall in iron ore prices. The prices fell by ~40% this year. While companies’ steel operations—like MT and X—benefit from falling iron prices, their mining operations’ profitability decreased. While iron ore’s selling prices came down, the per unit cost of production hasn’t changed

Integrated steel mills are at a disadvantage

For integrated steel mills—like MT and X—the falling iron ore prices aren’t a positive sign. Other companies—like AK Steel (AKS)—purchase the majority of their raw materials from third parties. Their raw material costs decreased.

In Part 3 in this series, we saw how lower raw material prices boosted AK Steel’s third quarter profits. According to analysts’ estimates, production costs came down by ~$100 per ton for steel makers using blast furnaces.

Since AKS mainly uses blast furnaces and purchases most of its raw material requirements from third parties, it benefited from falling raw material prices. In the next part of the series, we’ll discuss why AK Steel’s production costs could decrease more.

We’ll also look at how mini mills—like Nucor (or NUE) and Steel Dynamics (STLD)—are impacted by decreasing iron ore prices. Currently, NUE and STLD are part of the SPDR S&P Metals and Mining ETF (XME).

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