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Will Steel Prices Go Aluminum’s Way in 2019?

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Steel

Last year, alumina prices surged to record highs. US sanctions on RUSAL coupled with the closure of Norsk Hydro’s Alunorte refinery lifted alumina prices. However, aluminum prices faced pressure from soft demand and record Chinese aluminum exports.

The automotive industry, which is among aluminum’s key end consumers, has slowed down in most major economies.

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Divergence

Generally, raw materials and finished metals prices tend to move in tandem. However, last year, we saw a divergence in alumina and aluminum prices. Aluminum was subdued amid weak demand despite cost-push inflation. The alumina-to-aluminum ratio spiked amid the divergence. Meanwhile, alumina prices have come down this year as RUSAL sanctions have been lifted and Alunorte has partially commenced operations.

Seaborne iron ore prices

In 2019, seaborne iron ore prices (CLF) have jumped following issues at Vale (VALE). However, we haven’t seen a corresponding rise in steel prices. Using last year’s analogy, we could blame soft global demand and rising Chinese steel exports for the divergence of steel and iron ore prices.

Steel’s outlook looks somewhat better amid signs of a revival in the Chinese economy. China’s first-quarter GDP was better than expected. Some other economic indicators also showed that the Chinese economy could be bottoming out.

US steel prices (AKS) (NUE) have lagged global steel prices in 2019. Typically, US steel prices are more correlated with scrap prices than with seaborne iron ore prices. Several analysts have raised concerns over rising US steel production capacity. U.S. Steel Corporation (X) was downgraded by both Credit Suisse and Bank of America Merrill Lynch earlier this month due to overcapacity concerns.

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