Steel has been among the best performing industrial metals (COMT) this year. So far, HRC (hot-rolled coil) prices in the US have gained ~67%, while Chinese HRC prices have risen almost 30% YTD (year-to-date). The benchmark iron ore contract has gained 27% YTD. However, the performance of other base metals has been subdued in 2016. Copper is trading almost flat—compared to its closing price last year. Aluminum is trading with YTD gains of 10.3%.
The issues facing aluminum and steel are similar. Massive global overcapacity, especially in China, is putting pressure on metal prices. To add to the woes, China has been exporting its excess capacity overseas to keep its factories running. However, while China’s steel exports have increased YoY (year-over-year) in the first five months of the year, its aluminum exports have fallen YoY.
Meanwhile, the US hasn’t been the direct recipient of much of the Chinese steel—thanks to the trade victories secured by steel companies including U.S. Steel Corporation (X), AK Steel (AKS), Nucor (NUE), and ArcelorMittal (MT).
Steel demand still subdued
The decline in Chinese aluminum exports supported aluminum prices. Aluminum’s demand side of the equation looks better placed—compared to steel. Even the most pessimistic estimates would put global aluminum demand growth at around 4% YoY this year. On the contrary, you have to be an optimist to think that global steel demand can grow even by a modest 1% this year. Apparently, the World Steel Association expects global steel demand to fall 0.8% YoY in 2016.
In light of the above argument, is steel’s outperformance over other industrial metals justified? More importantly, can we expect steel to continue to outperform other industrial metals in the coming months as well? We’ll explore this in detail in the next part of the series.