Since the beginning of this year, steel input costs have been declining, with iron ore down 13 percent, seaborne scrap prices down 13 percent, and hard-coking coal down 9 percent. This is not really good news for the global steel prices since the global utilization rates of 74.4 percent and U.S. utilization rates of 76 percent do not suggest sustainable pricing power.
Scrap prices are of most importance to the U.S. steel producers, as almost 60 percent of the U.S. steel production comes from Electric Arc Furnaces (EAFs) and the direction of the scrap prices are often an indication of the direction of steel prices. U.S. Scrap prices remain above sustainable levels, even after coming off from January highs, and given current conditions and expected to decline further.
Turkey is a key buyer of U.S. scrap. Historically landed prices for heavy-melt have been trading at a premium e.g. a $28 per ton premium in 2013 and $35 per ton premium in 2012. However, the current landed prices for heavy-melt reflect a discount of $35 per ton to Midwest (Turkish prices of $348 per ton versus Midwest levels $383 per ton.) Although it’s not the case at the moment, taking into account the freight costs, it makes sense for Turkey’s import prices to be quoted at a premium. On the other hand, U.S. East Coast HM scrap prices are trading at a $60 per ton discount to Turkey and $95 per ton discount to Midwest. Regional arbitraging should equalize pricing over time. The point is, unless international scrap prices meaningfully improve, Midwest scrap prices will have to adjust lower.
At the same time, steel imports to the U.S. are also increasing. According to the most recent data, carbon steel imports through February 26 increased 12 percent Y/Y with still two more days of flow to capture. Russia, Korea, UK, and India were the largest Y/Y contributors. January imports level of 2.96 million tons, represent a Y/Y increase of 24.5 percent and are the highest level since 2007. It is often the case that imports surge when other countries attempt to benefit from high U.S pricing. However, when the arbitrage window closes, imports should decline.
While the imports are increasing, at the same time, efforts to limit imports of certain products are also proving difficult. In a surprising move recently, Department of Commerce announced 0 percent duties on Korea, the largest exporter of OCTG products to U.S. The ITA in a preliminary determination also opted not to impose anti-dumping duties on rebar from Turkey. Turkish rebar accounted for more than 50 percent of 2013 total imports. While United States Steel (X) is most affected by the OCTG ruling, the rebar case mostly impacts Nucor (NYSE:NUE) and Commercial Metals Company (NYSE:CMC).
Although it was expected steel prices would drop in 2014, the pace of decline has been sharper than expected. All of the major input costs including iron ore, hard coking coal, and seaborne scrap prices are down YTD. Moreover, initial indications are scrap prices would decline further in March, as weather temporarily impacts domestic steel demand and production. However, of greater importance is the fact that international bids for US scrap remains weak, creating an unsustainable pricing disequilibrium.