There are several grades of steel products unlike aluminum and copper where we don’t have much variation in grades. Furthermore, pricing varies significantly between different steel types. Two of the most used steel products are hot rolled coil (or HRC) and cold rolled coil (or CRC). CRC is typically priced higher as compared to HRC. Because it is lower cost, hot rolled steel is more widely used in mass applications.
Cold rolled steel, on the other hand, is a finished version of steel. It is used when a better surface finish is required. Typical applications include automotive bodies. Note that the automotive industry uses high-grade steel products. ArcelorMittal (MT) is the leading steel supplier to the automotive sector. AK Steel (AKS) is another major supplier to US automotive companies.
Spread is rising
The graph above shows the spread between spot HRC and CRC prices as estimated by the Metal Bulletin. In the last three years, the average spread between HRC and CRC prices has been ~$120 per short ton. We saw the spread falling to a low of $90 per short ton in April 2013. Currently, the spread is $150 per short ton, which is the highest that we have seen for a long time. So what does it mean for steel companies?
The spot HRC-CRC spread has generally been mean reverting. In April 2014, spreads crossed $140 per short ton as CRC prices rose out of proportion to spot HRC prices. However, the spread returned to $120 per short ton by the next month driven by the increase in HRC prices. Again in January 2015, the spread widened to $140 per short ton due to the downward correction in spot HRC prices. However, by April, the spread again reverted to $120 per short ton as CRC prices also fell.
Currently, the spread is $150 per short ton. What are the implications of this near-record spread for steel companies like U.S. Steel (X) and Nucor (NUE)? We’ll explore this in the next part of the series.
You can also consider the Materials Select Sector SPDR ETF (XLB) to get diversified exposure to the materials sector. Metal producers currently form ~9% of XLB’s portfolio.