US steel prices
Steel prices are the key driver of steel companies’ earnings. US steel prices rose sharply in 2018. The benchmark HRC (hot-rolled coil) rose to the highest level in a decade. However, the rise in some of the other steel grades like CRC (cold-rolled coil) was lower.
After a strong first half of 2018, US steel prices came under pressure in the third quarter and continued to fall in November. Spot HRC is below the $800 per ton level despite efforts by companies like Nucor (NUE) and ArcelorMittal (MT) to increase the prices. What’s contributing to the slide in US steel prices?
The recent weakness in US steel prices can be attributed to weak global steel prices. Chinese steel prices have fallen ~20% from their 2018 peaks. While US steel companies are still enjoying near-record spreads over global steel prices, falling global steel prices have lowered the base. Seaborne iron ore (CLF), which has been among the better-performing metals in 2018, has also come under pressure amid concerns about Chinese demand.
China’s growth outlook has been muddied amid its trade war with the US. China is the world’s largest steel producer and exporter. Concerns about Chinese demand tend to send ripples across global steel markets. We saw something similar in 2015 when falling Chinese steel prices led to a sell-off in global steel prices. US steel companies like U.S. Steel Corporation (X) and AK Steel (AKS) had to shut down plants. Their earnings nosedived with HRC prices falling below $400 per ton in the fourth quarter of 2015.
Markets have been frugal in valuing their stocks, which we’ll discuss in the next part.