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Implications of Falling Raw Material Prices for Steel Companies

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Falling raw material prices

Previously, we noted that steel prices have come down steeply. Among other factors, falling raw material prices have played a crucial role in the correction in steel prices. In this article, we’ll take a look at the recent trends in prices of raw materials for steel making.

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Iron ore prices have been stable

The chart above shows the prices of benchmark iron ore prices for export to China. Prices have recovered somewhat from the decade-low levels that they hit towards the end of July. Nevertheless, benchmark iron ore prices have lost ~19% since the beginning of 2015. Iron ore prices had earlier fallen almost 50% in 2014 as well.

Lower iron ore prices have reduced the unit production costs for steel companies that source iron ore from third parties. However, steel companies including U.S. Steel (X) and ArcelorMittal (MT) operate captive iron ore mines. These companies have not been able to realize full benefits from the fall in iron ore prices.

Meanwhile, several Chinese steel mills rely on imported iron ore. As a result, these companies have been able to take full advantage of lower seaborne iron ore prices. Chinese steel companies have also benefited from lower seaborne coal prices. Lower seaborne iron ore and coal prices have added to Chinese steel companies’ competitive advantage.

Steel scrap prices

Steel companies like Steel Dynamics (STLD) and Nucor (NUE) mainly use steel scrap to produce steel. The chart above shows the price movement of the benchmark heavy melting scrap. The data are released by the Metal Bulletin. Steel scrap prices have come down ~15% since June.

Lower steel scrap prices would help bring down the unit production costs for both Nucor and Steel Dynamics. However, there would be a time lag before the lower scrap costs start reflecting in these companies’ cost structure.

Nucor currently forms 2.73% of the Materials Select Sector SPDR ETF (XLB).

The biggest challenge for US steel companies has been the surge in steel imports. In the next part, we’ll find out how much steel the United States imported in July.

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