Rising coal prices
Iron ore, steel scrap, and coking coal are the key raw materials that go into steel production. While US steel companies including Nucor (NUE) and Steel Dynamics (STLD) rely mainly on steel scrap, U.S. Steel (X) and AK Steel (AKS) mainly use iron ore as a raw material.
We should remember that although coking coal and iron ore prices don’t have much impact on US steel prices in the short term, they tend to impact steel prices in most other countries. While steel prices globally would get support from higher iron ore and coking coal prices, US steel prices generally follow steel scrap prices. You can see this in the above graph. Steel scrap prices have been weak due to subdued scrap demand from mini mills.
U.S. Steel at a disadvantage
Another important aspect to note is that while mini mills like Nucor and Steel Dynamics would see their input costs fall due to lower scrap prices, U.S. Steel wouldn’t have any tailwind in the form of falling input costs. On the contrary, rising coking coal prices could lead to a higher input cost for U.S. Steel. It would be at a disadvantage compared to mini mills. AK Steel (AKS) also uses coking coal (KOL) as a raw material for its blast furnaces.
3Q16 earnings call
However, during the 3Q16 earnings call, AK Steel tried to allay some of the fears related to higher coking coal prices. James Vasquez, AK Steel’s CFO said that the company started “negotiations early” for its coking coal contracts. He also added that higher coking coal prices are “not a major concern at this point.”
Coking coal contracts could be a key concern that might pop up during U.S. Steel’s 3Q16 earnings call. You can read U.S. Steel’s 3Q16 Earnings: What’s the Word on Wall Street? to learn more about market expectations from U.S. Steel’s 3Q16 earnings.
Don’t forget to visit Market Realist’s Steel page for a detailed analysis of U.S. Steel’s 3Q16 financial results.