The biggest gains in the steel space this year were seen in flat rolled steel prices, where US steel companies managed to have stiff duties imposed on imports from countries such as China.
However, we’ve started to see a gradual rise in flat steel imports. Let’s discuss this in perspective.
According to the preliminary data released by the United States Census Bureau, cold rolled coil (or CRC) imports totaled 214,000 metric tons in August 2016, a year-over-year (or YoY) rise of almost 11%. Imports rose on a month-over-month basis, too. In absolute terms, August CRC imports were the highest they’d been in the last 13 months.
Steel companies have already seen their pricing power erode in the hot rolled space, where spot prices have plummeted more than $100 per short ton from their June peak. Alarmed by steadily increasing CRC imports, US steel companies have again resorted to activism.
According to a Reuters report citing Kelley Drye & Warren, U.S. Steel (X), ArcelorMittal (MT), Nucor (NUE), and AK Steel (AKS) “will file petitions with the U.S. Commerce Department charging Chinese producers with diverting shipments through Vietnam to avoid American import tariffs.” The process of diverting shipments through a third country is referred to as transshipment.
In our view, higher US CRC prices could act as an incentive for US steel buyers to explore international suppliers. Disregarding the spread between US and Chinese CRC prices, current US CRC pricing is much higher, even compared to Western Europe. There are enough countries in the world that can supply CRC to US buyers at lower prices.
On their part, US steel producers have been maintaining supply discipline to counter steel imports. We’ll discuss this more in the next article.
The SPDR S&P Metals and Mining ETF (XME) has ~50% of its holdings in US-based steel companies. This ETF could be an alternative way to play the steel industry for investors who wish to avoid the hassles of picking individual stocks.