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How’s the Raw Material Market Impacting Steel Prices in 2016?

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Nov. 20 2020, Updated 2:27 p.m. ET

Raw material

Steel production is raw material–intensive in nature. Iron ore, steel scrap, and coking coal are the key raw materials that go into steel production. Raw material prices are a key indicator that steel investors should track closely.

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Integrated operations

Most steel companies have backward integrated operations to secure their raw material supplies. For instance, U.S. Steel Corporation (X) and ArcelorMittal (MT) have captive iron ore mines. Apparently, ArcelorMittal is among the top five iron ore miners globally. The company also has captive coal mines. AK Steel (AKS) had backward integrated operations through its investment in Magnetation. However, the joint venture had financial difficulties as a result of lower iron ore prices. Eventually, AK Steel wrote off its entire investment in the joint venture. Minimills like Steel Dynamics (STLD) and Nucor (NUE) mainly use steel scrap as the raw material to produce steel. To fulfill their raw material requirement, they setup scrap processing facilities to help them source steel scrap for their business.

You can also consider the Materials Select Sector SPDR ETF (XLB) to get diversified exposure to the materials sector. Currently, metal producers form 12.6% of XLB’s portfolio.

Series overview

In this series, we’ll look at the recent trend in steelmaking raw materials. We’ll also see how raw material prices are impacting steel prices and what investors can expect in the coming months. Please note that US steel prices have gained sharply this year largely due to trade cases. However, the rally seems to be coming to an end. US steel prices have fallen in August, as you can see in the above graph. Read Is the Trade Action-Fueled Steel Rally Coming to an End? to learn more.

In the next part, we’ll see how are iron ore prices are shaping up this year.

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