Iron ore prices fall
Iron ore prices are a key metric investors in steel plays should watch. Iron ore is the primary raw material for producing steel. Almost all of iron ore that is mined is used for making steel. The SPDR S&P Metals and Mining ETF (XME) has invested in some of the iron ore mining companies.
Iron ore prices continue falling
Iron ore price has been on a downward spiral this year, as the previous chart shows. Iron ore prices are down by ~45% year-to-date. You might think that since raw material costs are coming down, steel companies stand to benefit. This argument is only partially correct.
Steel companies such as ArcelorMittal SA (MT) and United States Steel Corporation (X) also have mining assets. These companies acquired these assets in anticipation that iron ore prices would rise. But the movement in iron ore prices has been otherwise.
While the steel operations of these two companies reap the benefits of falling iron prices, the profitability of their mining operations comes down. Lower profits from mining operations has been one of the reasons behind the lackluster performance of ArcelorMittal.
AK Steel can be a beneficiary of lower iron ore prices
AK Steel Holding Corporation (AKS) sources most of its iron ore from third parties. It posted higher profits in 3Q due to lower raw material costs. Iron ore prices are down ~13% so far in 4Q, which will likely benefit AK Steel in the current quarter.
Steel companies such as Nucor Corporation (NUE) don’t use much iron ore for producing steel. Nucor produces steel through electric arc furnaces using steel scrap. We’ll analyze the trend in steel scrap prices next.