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Is Lower Scrap Pricing Driving Steel Prices Lower?

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Scrap pricing

Raw material prices tend to impact steel pricing. Steel scrap, iron ore, and coal are among the key raw materials used in steelmaking. Integrated steelmakers like U.S. Steel Corporation (X) and ArcelorMittal (MT) rely more on iron ore. Both of these companies have captive iron ore mines to cater to their iron ore needs. However, Nucor (NUE) and Steel Dynamics (STLD) mainly rely on steel scrap to produce steel.

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Scrap versus steel

The above graph shows the movement in spot HRC (hot-rolled coil) prices plotted against benchmark-heavy melting scrap, according to data compiled by the Metal Bulletin. As you can see, spot HRC prices have been moving in tandem with scrap prices.

At the end of last month, we saw a small correction in steel scrap prices. It has been mirrored in steel prices as well. In our previous series, we noted that steel scrap prices look close to their near-term peak levels and we could see a correction. We noted that while seaborne iron ore prices have corrected from their April highs, US steel scrap prices were still rising.

It’s important to note that US scrap prices don’t follow seaborne iron ore prices in the short term. Over the medium to long term, changes in alternate raw material costs tend to impact the overall dynamics.

Outlook

One of the reasons driving scrap pricing higher was Turkish demand as well as strong domestic demand in the US led by mini mills. They increased their production to capitalize on higher steel prices. However, with Turkish demand showed signs of slowing down, and the second half of the year usually being seasonally slower in terms of steel demand in the US (DIA), we could see some more weakness in steel scrap pricing. This could also put pressure on steel prices.

In the next part of the series, we’ll see how Chinese steel prices could play out in 2H16.

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