Spot steel pricing
The price of steel is a key driver of steel companies’ earnings. Steel companies sell their products either on a spot basis or to contract customers. Pricing in contract sales is reset at regular intervals depending on several variables, including prevailing spot steel prices. However, steel companies’ spot sales are more vulnerable to the volatility in steel prices. Let’s see how spot steel pricing is shaping up in the United States.
The above graph shows the price trend in spot US HRC (hot rolled coil) as appraised by the Metal Bulletin. Please note that there are several grades of steel. However, analysts see the HRC price as a benchmark for other steel products. As of November 20, 2015, spot HRC prices were quoted at $370 per short ton. Spot steel prices have fallen more than 20% since September and have now reached their 2009 lows.
Most steel companies reported lower steel selling prices in 3Q15. The average steel selling prices of U.S. Steel (X) and AK Steel (AKS) fell more than 2% in 3Q15 compared to 2Q15. However, Nucor’s (NUE) average steel selling prices in 3Q15 were almost flat compared to the previous quarter. Further deteriorating spot steel prices would negatively impact steel companies’ 4Q15 earnings as well.
Why are steel prices falling?
There are several reasons for the weakness in spot steel pricing. One, of course, is weak sentiments around commodity prices. Copper and aluminum have also recently made fresh six-and-half-year lows. However, there are other factors that are leading to historically low steel prices. We’ll discuss these in detail in the next part of the series.