Generally, lower raw material prices are seen as a positive sign for any industry. With all other things equal, lower raw material costs lead to lesser unit production costs and higher profit margins. However, it’s not that simple a relationship when it comes to steel. In this part of the series, we’ll see how lower raw material prices affect steel companies.
Vertically integrated
Vertically integrated steel companies, including U.S. Steel (X) and ArcelorMittal (MT), don’t stand to gain much from falling steel prices. These companies produce most of their iron ore through captive mines, which means they haven’t benefited from the decade-low seaborne iron ore prices.
Iron ore prices have fallen on the slowdown in Chinese steel demand and rising production by iron ore miners such as BHP Billiton (BHP), Rio Tinto (RIO), and Vale SA (VALE). Together, BHP and RIO form ~6.2% of the SPDR S&P Global Natural Resources ETF (GNR).
Steel scrap
The above graph shows the price movement of the benchmark heavy melting scrap. The data are released by the Metal Bulletin. Steel scrap prices were quoted at $138 per metric ton on November 9, 2015, a year-over-year decline of more than 55%. Nucor (NUE) and Steel Dynamics (STLD) use steel scrap as their primary raw material. These companies’ steel operations would benefit from falling steel scrap prices. However, their metal recycling operations would be negatively impacted as a result of lower scrap prices.
AK Steel’s CEO (chief executive officer), James L. Wainscott, gave a note of caution. During the company’s 3Q15 earnings call, he said, “On the heels of the substantial decline in carbon steel spot market prices the latest challenge we’re facing is that our contract customers now want to pay lower prices for their steel as well. They want to benefit from the reduction in our steelmaking input costs and all of the actions that we’ve pursued internally to remain healthy in the face of what we believe is unfair trade.”
Other steel companies could also face tough contract negotiations next year if raw material prices stay low. Read Key for Investors: Steel Industry’s Outlook Keeps Getting Worse to learn more about what other factors could drive steel companies in the coming months.
You can also visit Market Realist’s Steel page for the other latest developments in this industry.
Source: https://marketrealist.com