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Will the HRC-CRC Spread See Some Mean Reversion in 2H16?

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HRC-CRC spread

Import replacement has long been a challenge for US steel producers. Simply put, if a trade action is imposed against one country, imports start coming in from other locations.

OCTG (oil country tubular goods) is a perfect example of such replacement. When Chinese OCTG products were slapped with trade duties, we saw an almost instantaneous increase in imports from Korea.

Notably, the issue of steel imports cropped up during the respective 2Q16 calls of U.S. Steel Corporation (X), Nucor (NUE), and ArcelorMittal (MT). You can read What Is U.S. Steel’s Take on Steel Imports? to explore what different companies had to say about this burning issue during their respective 2Q16 earnings calls.

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Rising spreads

During its 2Q16 call, AK Steel (AKS) pointed to a “significant rise” in cold rolled coil (or CRC) steel imports from Turkey, Vietnam, and Australia. AK Steel also said that “the gap between foreign and domestic prices has the potential to encourage increased import levels.”

Notably, the spread is even wider in CRC products, as US CRC prices have risen much more steeply than international prices. According to SteelBenchmarker, the spread between US and world export prices is ~$300 per metric ton for HRC (hot rolled coil), while the spread for CRC is in the ballpark of $450 per metric ton.

It might take time

It’s important to note that we might not see a sudden surge in imports despite widening spreads. It takes time to develop new supply lines, especially when you’re dealing with producers in different geographies. Also, even after steel buyers identify potential sellers and place orders, it could take a few months for the steel to actually reach US buyers (MDY).

We could see some mean reversion in HRC-CRC prices in the coming quarters. Having said that, the spread might not fall to its historical levels given the current market dynamic. Steelmakers with high CRC exposures such as U.S. Steel could feel the heat if there’s a fall in CRC prices.

In the next part of the series, we’ll explore what US steel producers are doing to prevent any slide in steel prices.

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