- Steel prices have continued to rally and have reached $825/t of HRC (short-ton, US benchmark) in the US
- The US steel market is relatively small and isolated but may be a good sentiment indicator
- We share the view that the supply squeeze may ease after additional capacities restart in 1H21e
Steel prices have continued to rally and have reached $825/t of HRC (short-ton, US benchmark) in the US. We see calls across the street that the US benchmark price may climb to $920/t in the near-term because of a supply squeeze.
The US steel market is relatively small and isolated but may be a good sentiment indicator. The last time we saw the US HRC climbing above $900/t was in 1H18 when President Trump used Section 232 authority to apply 25% tariffs on imported steel products. The price benchmark also touched $880/t level in 2011, when the commodity market was booming on the Chinese recovery.
In addition, iron ore futures in Singapore closed in on $150/t as supply from Australia declined, and Brazilian Vale SA trimmed 2021 production guidance last week. According to Mysteel Global, it is about $45 below the all-time high reached in 2010. The consumption ratio is about 1.7 ton of iron ore per ton of crude steel, while iron ore contributes 40% plus to the cash cost per ton of steel for non-integrated steel-mills. Therefore, we see a solid cost-push across the global steel curve.
The Russian integrated steel producers including NLMK, Severstal and EVRAZ benefit in the current environment being 100% integrated into iron ore and demonstrating strong foot-print on core export markets. We note that US Steel (X.US) being a traditional bellwether in the North American steel sector trades at $17-18/share level as it usually goes to $30-40/share during strong rallies. Steel sector is for trading rather than for fundamental investing.
We share the view that the supply squeeze may ease after additional capacities restart in 1H21e. The holiday season including Christmas and the Lunar NY festivities and construction activity slowdown during winter may put pressure on steel demand. However, the current spot steel and iron ore prices reflect a solid gap between commodity price benchmarks and steel names valuations on mark-to-market basis.
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