WSD Strategic Insights XXXVI: Out-of-whack steel pricing relationships

We are currently witness to what WSD considers to be steel pricing anomalies--i.e., pricing spreads that are not sustainable. Here are some examples.

The huge price premium for HRB in the US versus the world price and the Chinese mills' ex-works price. The figures per metric ton are $760, $545 and $455 respectively. (Note: If there was a liquid futures market for these products, we suspect that many "investors" would seek to play these spreads.)

Steel scrap and merchant pig iron price appear quite high versus the international prices of iron ore and coking coal. As indicated in the graphic on the next page, the premium for the steel scrap price at about $100 per ton is lofty. (Note: Might the spread narrow because iron ore and coking coal rise in price and the steel scrap price stays flat?)
US shredded steel scrap appears at least $50 per ton, if not $75 per ton, overpriced relative to the aggregated value of iron ore (when multiplying its price by 1.6) and coking coal (when multiplying its price by 0.8)--which is done to model the cost of these items per ton of pig iron. As indicated in the accompanying graphic, steel scrap appears to be substantially overpriced based on this analysis (which is theoretical).

Steel slab is high priced on the world market relative to the export price of hot-rolled band. For example, the price of slab delivered to the Far East may be about $535 per ton, say our contacts, while slab price delivered to the USA may be closer to $555 per ton. Currently, the world export price for hot-rolled band is only about $10-30 per ton above this figure. How do we explain the strong slab price? One reason is that some sellers have held back their offerings. Also, the ArcelorMittal plants in Brazil and Western Mexico are now providing up the three million tons of slab annually to the former ThyssenKrupp USA facilities in Alabama (now owned by ArcelorMittal and NSSMC). And, it takes at least six months for a new supplier of a specialized slab product to become qualified.

The rebar and wire rod offering prices on the world market by the Chinese steel mills-- and, perhaps, in the future by Russia/Ukraine steel mills--are about $485-500 per ton, FOB the port of export, which is $50-70 per ton less than the offering price by steel-scrap-using EAF steelmakers who make these products in Turkey, Japan, South Korea and, to some extent, India. We call this condition “disintermediation steel industry style" because the high-cost providers are being eliminated from the supply chain.

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