Steel prices skyrocketing
Steel prices are the major driver of steelmakers’ earnings and revenues. According to Platts, US (SPY) steel prices rose 17.5% on average in 2017 compared to 2016. So far in 2018, the momentum has remained strong.
US spot HRC (hot roll coil) prices are hovering near a ten-year high. According to SteelBenchmarker, US HRC prices were $982 per metric ton on June 11. Higher steel prices are expected to boost earnings for steel companies like U.S. Steel (X) and AK Steel (AKS).
Correction in the cards?
US steel prices have generally been among the highest in the world. However, the current spreads are at historical widths. There are several factors that could lead to correction in the prices going forward. For one, the premiums to the rest of the world have skyrocketed and don’t look sustainable. However, the spreads might still settle at a higher level compared to what we’ve seen historically. Also, the United States Commerce Department might have to introduce some measures to protect the downstream steel industry from the impact of higher steel prices in the United States.
Still supportive to earnings
So while the prices could fall, they are still expected to remain supportive of the steelmakers’ earnings along with firm demand. Cleveland Cliffs’ (CLF) CEO, Lourenco Goncalves, mentioned during its Q1 2018 earnings call that the steel mill business is expected to remain strong this year and support prices “no matter what happens with Section 232.”
Whereas US HRC prices currently are at ~$900 per ton, during its Q1 2018 results, Cliffs assumed a year-to-date average of $770 per ton on HRC prices to arrive at its expected US realized prices between $97 and $102 per ton. Based on current levels, Cliffs’ guidance could have upside potential.