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Will Average Realized Steel Prices Be Any Better in 2016?

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Average realized steel prices

Previously in this series, we talked about how US steel companies including U.S. Steel Corporation (X) and Steel Dynamics (STLD) reported lower average realized steel prices in 4Q15 over the previous quarter. We could see significant YoY (year-over-year) declines in steel companies’ average steel selling prices in 1H16, as well, because steel prices last year at this time were much higher than what they are currently. And this applies to both spot and contract pricing.

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Sequential declines

The YoY decline in average steel selling prices was driven by markets. In 2016, markets will likely focus on the sequential or quarter-over-quarter changes in steel prices. In 4Q15, for example, spot steel prices in the US fell to levels unseen in more than a decade.

However, we have seen a bounce back in spot prices. The graph above shows the trend in hot-roll coil prices as estimated by Metal Bulletin. Spot steel prices have recovered by almost $50 per short ton in the last couple of months and are currently quoted in the ballpark of $400 per short ton.

2016 prices

In 1Q16, higher spot steel prices will likely support steel companies’ average steel selling prices. However, contract pricing might be a drag on average realized prices, as several supply contracts are negotiated on a calendar year basis. Beyond 1Q16, average steel selling prices should also depend on the stickiness of recent price hikes by steel companies such as AK Steel (AKS).

Investors who want to avoid the hassles of picking individual stocks can also consider the SPDR S&P Metals and Mining ETF (XME). XME invests almost half of its holdings in US based steel companies. Nucor Corporation (NUE) forms 5% of XME’s portfolio.

In the next part of this series, we’ll explore why the recent uptrend in spot steel prices could lose steam.

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