Higher spot prices
Steel companies’ earnings are sensitive to changes in steel prices (DBC). We saw a significant recovery in US steel prices over the last few weeks. However, the impact of higher steel prices might not be immediately reflected in steel companies’ earnings.
Note that there are lead times before steel mills take spot orders and steel is delivered to the buyers. Looking at the current market dynamics, lead times for CRC (cold-rolled coil) prices are higher than they are for HRC (hot-rolled coil). As a result, the HRC-CRC spread rose to record highs this year, as you can see in the above graph. During its 3Q16 earnings release, U.S. Steel Corporation (X) said that lead times for HRC products are around four weeks, while lead times for CRC and coated products are approximately seven weeks.
Some of the metal that steel companies will ship in the spot market in 4Q16 was booked in August and September 2016. Steel prices were especially subdued in September. It would mean that the full impact of higher steel prices might not flow to steelmakers’ 4Q16 earnings.
However, higher lag pricing could be a tailwind for steelmakers in 1Q17. The added advantage of higher seasonal shipments in 1Q17 would aid steel companies’ 1Q17 earnings. As we noted in the previous part, steel companies like ArcelorMittal (MT), AK Steel (AKS), and Nucor (NUE) would also benefit from higher contract pricing in 1Q17.
While higher steel prices would support steelmakers 2017 earnings, higher raw material prices could be a drag. We’ll discuss this more in the next part.