kusadasi schreef op 2 juni 2017 20:35:
PART 5
Does Further Downside Await Cliffs Natural Resources? PART 5 OF 10
Are US Steel Prices in for a Rough Ride on Widening Spreads?
By Annie Gilroy | Jun 2, 2017 11:33 am EDT
Steel supply and demand
In the previous parts of this series, we discussed US steel supply as determined by production and imports as well as US steel demand. These are the two main factors that determine steel prices.
Due to excessive import duties, imports fell in 2016, which led to a surge in US steel prices in the year. In this article, we’ll see how these dynamics are playing out for US steel prices in 2017.
Are US Steel Prices in for a Rough Ride on Widening Spreads?
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Rising spreads lead to price pressure
The spread between the US steel prices and steel prices in the rest of the world determines the attractiveness of imports into the United States. This spread is currently on the rise. As we saw earlier, US imports have been on the rise for the last few months. In fact, in March 2017, imports into the United States were at their highest level since May 2015.
The recent rise in domestic steel prices led to the widening of the spread, which worked as a magnet for imports. When the spread widens to unsustainable levels, higher, cheaper imports lead to a fall in the overall price level, suppressing the spread. According to the MetalMiner Index, hot rolled coil (or HRC) prices have fallen ~5% since they peaked in April 2017.
Outlook
Until the spread comes down to more sustainable levels, US steel prices could be in for a rough ride. The above graph shows recent movements in US HRC prices (SLX). Lower spot prices negatively impact the earnings of steelmakers such as U.S. Steel Corporation (X), ArcelorMittal (MT), Nucor (NUE), and AK Steel (AKS). They’re also negative for the raw materials supplier to some of these companies, Cliffs Natural Resources (CLF).
Investors may want to consider investing in the SPDR S&P Metals & Mining ETF (XME) to avoid the hassles of picking individual stocks.Apart from the steel dynamics in the United States, the seaborne iron ore supply and demand scenario also affects Cliffs Natural Resources’ fortunes. We’ll see how this is panning out for the company in the next part of the series.