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Steel is the Last Bastion to Fall amid Covid19 Pandemic

By Mohit Oberoi, CFA - Published 6 Months ago. 0 Comment
Steel is the Last Bastion to Fall amid Covid19 Pandemic
  • Steel prices globally have come under pressure following other industrial metals. Notably, US steel prices were quite stable in the early days of Covid19 pandemic even as other industrial metals were in a free fall.

  • Now, as end user demand has come under pressure, steel prices have also fallen.

 

Steel prices

Industrial metal prices have been under pressure this year due to the Covid19 pandemic. While metals like copper and aluminum were weak since almost the beginning of the year, US steel prices held their ground. Seaborne iron ore was another exception. Let us first see why steel and iron ore prices bucked the trend in early days of Covid19 crisis. Then, we’ll see why steel prices have now come under pressure.

 

Seaborne iron ore prices

 Iron ore has been pretty much a supply-side story for the last couple of years. Supply disruptions at Vale have hit supply. To add to that, Chinese iron ore demand has been quite strong. The country’s steel production rose sharply last year. Chinese steel mills continued to churn out astronomical amount of steel in January and February as well despite the shutdowns. Typically, metal prices have a linkage to raw material prices. There tend to be dislocations at times as we saw in aluminum supply chain in 2018. While alumina prices surged following curtailment of Norsk Hydro’s Alunorte refinery, there wasn’t a commensurate rise in aluminum prices. Aluminum smelters that rely on third parties for alumina were hit hard due to the divergence in alumina and aluminum prices.

 

Dislocation in steel and iron ore markets also

Amid the Covid19 pandemic, the alumina to aluminum ratio is holding near its historical averages. Looking at steel and iron ore markets, while steel prices have fallen sharply, iron ore prices are still holding above $80 per metric ton. This would compound problems for blast furnaces that buy iron ore from third parties. Notably, US steel scrap prices have fallen sharply in line with domestic steel prices. Electric arc furnaces (EAFs) like the ones operated by Nucor and Steel Dynamics get a natural hedge as they mostly use steel scrap. Since US steel and scrap prices tend to move in tandem, EAFs don’t see wild swings in profitability unlike steel companies that operate blast furnaces.

 

End-user demand

Steel prices have come under pressure as the demand offtake from end-users has been weak. Several end users especially the automotive industry has shut operations globally. The energy industry is in bad shape due to the fall in crude oil prices. Construction activity has also been hit due to shutdowns. To sum it up, weak end-user demand and falling steel scrap prices have taken a toll on finished steel prices as well.

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