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Steel Mills Make Merry as Margins Rise on Higher Spreads

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Margins

Steel production is raw-material-intensive in nature. Iron ore, coking coal, and steel scrap are the key steelmaking inputs. Raw material pricing tends to impact steel prices as well. It also has an impact on steel companies’ profitability. We’ve seen a divergence in the steel and raw material markets this year, which has led to higher spreads for steel companies.

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Raw material prices

Seaborne iron ore prices (CLF) are still trading with marginal year-to-date losses despite the recent surge in prices. Spot coking coal prices (TECK) are also quoted at lower price levels than what we saw at the beginning of the year. On the other hand, Chinese steel prices have risen significantly this year.

Divergence

So what has this divergence meant for steel mill margins? According to Platts, on August 11, 2017, China’s HRC (hot rolled coil) export spreads rose to the highest level since at least October 2010. Higher spreads could prompt Chinese steel mills to produce more steel.

But this steel party is not limited to just Chinese steel mills. US steel producers are also making healthy profits. Nucor (NUE) just posted its highest first-half profits since the 2008 financial crisis. ArcelorMittal’s (MT) half-year profits were the highest since the first half of 2012. U.S. Steel (X), which posted a surprise loss in 1Q17, bounced back to profits in 2Q17. Its 2Q17 EBITDA (earnings before interest, tax, depreciation, and amortization) was the highest quarterly EBITDA since 4Q14.

However, ArcelorMittal raised a red flag over higher margins in China. We could see some compression in Chinese steel mill margins in the near term as Chinese authorities clamp down on higher steel prices.

In the next part of this series, we’ll see how US steel imports look in 2017.

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