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US steel prices are nearing their peak

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Section 232 tariffs kicked in on March 23 in the United States, but the full implications of the new trade regime are still unclear, clouding market sentiment in April. A question mark remains around exemptions, as some countries were granted temporary suspension from tariffs until May 1, while negotiations for permanent exemptions take place. In addition to Canada and Mexico, Australia, Argentina, Brazil, the EU, and South Korea were added to the list, taking the total of at least temporarily exempt countries to 34, amounting to approximately 66% of US steel imports in the past 12 months.

The only trade deal that was finalized by the time of writing was between the US and South Korea, stipulating that South Korean steel exports to the US will be limited to 70% of average annual shipments to the US over the period of 2015-2017. If this deal becomes a blueprint for negotiations with all other countries, we will see an implementation of a tariff-quota system that can benefit local US suppliers by establishing a cap on a significant part of foreign supply.

With domestic prices at multi-year highs, US flat-rolled steel mills saw a significant jump in their profit margins this year. The spread between hot-rolled coil (HRC) and busheling scrap prices reached $582 per tonne in early April, which is 78% above the long-term average value of $327 per tonne, making margins look increasingly unsustainable. And indeed, US HRC prices declined later in April, moving down by $13 per tonne in two weeks by April 19.

As Turkey faced tariff barriers to access the US market, Turkish producers started to look for new export destinations, dropping their offers, with weakness spreading primarily into the European long products market, where rebar prices have started to go down since the middle of April.

Similarly, in mid-April European HRC prices registered their first falls this year after remaining stable during March and early April. Since the start of the year, European HRC prices rose by 7%, and although this is below increases seen in the US domestic or CIS export markets – up by 32% and 11% respectively since early January – European end-users were resisting any further increases, not able to pass them to final customers. According to IHS 

Markit, publisher of PMI indicators, high input costs started to impact manufacturing activity in Germany, with the weakest rise in new orders in March since late 2016. IHS Markit particularly mentioned metals and steel as drivers of cost rises impacting competitiveness of German goods, with a stronger euro making the situation even more challenging for exporters of finished goods.

Section 232 investigation created fears that significant volumes of steel will be redirected from the US, putting pressure on local steel prices in a number of countries. As a result, the Canadian government announced new measures, making it possible to launch more aggressive anti-circumvention investigations, while the European Commission started a safeguard investigation into imports of 26 steel product types.

A separate row between the US and China about wider trade issues raised fears of a fully-fledged trade war, weighing on sentiment and the steel futures market in China. In the physical market, indicators of end-user demand for flat steel in China at the start of the year are weak, with output of motor vehicles and white goods showing negative rates of growth in the first quarter of the year compared with production in 2017. However, the flat steel market was supported by tighter supply conditions, as Chinese mills chose to ramp up output of long steel products, while HRC production rates declined, putting more pressure on domestic and export rebar prices.

Analysis by Marina Maliushkina, Metal Bulletin Research

In this regular section, Metal Bulletin Research’s base metals team summarise their in-depth reports to highlight key factors
driving the markets and their short-term price forecasts. The weekly service, Base Metals Market Tracker, provides independent analysis and forecasts for base metals markets and prices.

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