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Is There a Divergence in the Steel Raw Material Market?

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Raw material prices

Raw material prices tend to impact steel pricing. Steel scrap, iron ore, and coal are among the key raw materials used in steelmaking. In this part of the series, we’ll look at the steel scrap and iron ore prices and explore if there’s a divergence between their price action.

For US (VTI) steel producers such as Steel Dynamics (STLD) and Nucor (NUE), steel scrap pricing is a bigger driver than seaborne iron ore prices. The graph above shows the movement in spot hot-rolled coil (or HRC) prices plotted against benchmark-heavy melting scrap, according to data compiled by Metal Bulletin.

Anomalies

Seaborne iron ore prices have corrected from their April highs. Lower iron ore prices have been accompanied by a fall in Chinese steel prices, which we’ll explore later in this series. However, US steel scrap prices have been in an uptrend despite the correction in seaborne iron ore prices.

US scrap prices don’t follow seaborne iron ore prices in the short term. But over the medium term to long term, changes in alternate raw material costs tend to impact the overall dynamics. For instance, some companies such as Nucor can shift to DRI (direct reduced iron) if it becomes costlier to use steel scrap.

Scrap prices could fall

One thing driving US steel scrap prices has been strong demand from Turkey. Note that Turkey is the largest scrap importer, and the country’s imports influence scrap prices elsewhere. Since scrap prices have been strong while iron ore prices have corrected, Turkish steel companies might look at alternatives such as DRI and billets. This could mean that steel scrap prices might not rise much from these levels, and we could even see a small correction.

Since scrap prices have likely peaked, US steel prices might also not rise much from these levels. In the next part of the series, we’ll analyze if the correction in Chinese steel prices could impact steel prices in the United States as well.

Investors who want to avoid the hassles of picking individual stocks can also consider the SPDR S&P Metals and Mining ETF (XME). Together, Cliffs Natural Resources (CLF) and Allegheny Technology (ATI) form ~8.2% of XME’s portfolio.

Next, let’s see why Chinese steel prices have fallen and whether US steel prices could follow.

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