Steel scrap prices
We’ve already seen how US steel production continues to sag despite positive demand indicators. In this part of the series, we’ll look at the recent trend in steel scrap prices.
Steel Dynamics (STLD) and Nucor (NUE) use steel scrap to produce most of their steel. This is because they produce steel through electric arc furnaces (or EAF). Together, these companies form ~8.5% of the SPDR S&P Metals and Mining ETF (XME). Reliance Steel & Aluminum (RS) forms 4.39% of XME.
Steel scrap prices increase
In our previous series, we saw that steel scrap prices were moving sideways with an upward bias. The above graph shows the price movement of the benchmark heavy melting scrap. The data are released by Metal Bulletin. As you can see, steel scrap prices have largely traded sideways after the steep decline in February. They inched upward in June.
Impact on steel companies
Higher steel scrap prices would increase the unit production costs for Steel Dynamics and Nucor. However, both these companies also have metal recycling operations. The margins on metal recycling operations are typically better when scrap prices are higher. The profitability of STLD’s and NUE’s recycling operations was negatively hit when scrap prices dropped steeply earlier this year.
Steel Dynamics and Nucor are expected to release their 2Q15 financial results on July 21 and July 23, respectively. AK Steel’s (AKS) 2Q15 earnings are expected on July 28.
Iron ore is another crucial raw material for producing steel. In the next part, we’ll analyze the recent trend in iron ore prices.