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Can Falling Scrap Prices Drive US Steel Prices Lower?

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Scrap prices

Steelmaking is raw material intensive in nature, and raw material pricing tends to impact steel prices. In this article, we’ll discuss how steel scrap prices are playing out in the United States. To begin, we should note that integrated miners like U.S. Steel (X) and ArcelorMittal (MT) use primarily iron ore, whereas minimills like Nucor (NUE) and Steel Dynamics (STLD) rely more on steel scrap.

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Prices have been strong

For US steel producers, steel scrap pricing is a bigger driver than seaborne iron ore prices. Steel scrap prices have shown strength for the past couple of months. The above graph shows the movement in spot HRC (hot rolled coil) prices, plotted against benchmark-shredded scrap, according to data compiled by Metal Bulletin. As you can see, spot HRC prices have been moving in tandem with scrap prices.

Moderation

We’ve started to see some moderation in scrap pricing. During its 4Q16 earnings call, Steel Dynamics pointed to some weakness in the scrap market. Russel B. Rinn, STLD’s EVP (executive vice president), pointed out that “probably December and January markets got a little hotter than they probably should have.”

Rinn also stated: “I am anticipating we will see a mild correction in February and maybe a little bit in March, but I think beyond that I think we’re seeing a pretty robust market.”

It’s important to note that weakness in scrap pricing could have a direct impact on steel prices, and steelmakers (AKS) might find it tough to justify price increases if scrap prices fall.

In the next part, we’ll see how iron ore and coal prices are playing out.

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