Yahoo Finance Why Falling Steel Prices in China Should Bother Investors
How Did the Steel Industry Fare in July amid Chinese Slowdown?
Falling steel prices in China
As discussed previously, China (MCHI)(EWT) allowed the yuan to depreciate earlier this month. A falling yuan makes Chinese steel exports more competitive in the global markets.
The previous chart shows the average spot HRC (hot- rolled coil) prices in China. As you can see, steel prices have been on a free fall in China. The HRC price in China has fallen by more than 30% since the beginning of 2015. As of August 25, the average HRC price in China stands at 2050 yuan (approximately $328) per ton.
Higher steel prices in the US
Steel prices in China are much lower compared to in other countries such as the United States. According to Metal Bulletin, the average spot HRC price in the US was $460 per ton as of August 20. Interestingly, while spot steel prices in the US have been more or less stable over the last month, they have fallen in China. Nevertheless, the average HRC price in the US has come down ~20% since the beginning of 2015.
The rising differential between steel prices in China and other countries acts as an additional incentive for Chinese steel exporters. The price differential could keep Chinese steel exports at elevated levels despite frictions with several of its trading partners. Rising Chinese exports would also hamper any recovery in global steel prices in the coming months.
Contract pricing
Please note that while spot steel prices in the US have shown signs of stabilizing, average steel selling prices for steel companies including AK Steel (AKS), Steel Dynamics (STLD), and U.S. Steel (X) could still come down in 3Q15. This is because a lot of these companies’ sales are tied to contract customers.
These contracts generally have fixed prices, which are negotiated between steel companies and the end buyers. As new contracts come up for negotiation in the coming months, they are likely to be signed at lower prices due to the sharp decline in spot steel prices.
Lower raw material costs have helped bring down the unit production costs for steel companies. In the next part, we’ll talk about the recent trend in iron ore and steel scrap prices.
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