Steel Report: China 'Cost Umbrella'

Because China is now 60% of the global steel market, and is the region most impacted by global raw material price increases, China has created a 'cost umbrella' for the rest of the world.
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The Advance/Decliner Index is our effort to quantify the anecdotal price information we find in our everyday reading about global steel price trends. We also are looking at relative prices in the U.S. vs. abroad in our attempt to gauge international price pressure/opportunities heading our way

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Advance/Decliner Index Eases Back to 97%

: Our Advance/Decliner Index eased back to 97% this week, with a whopping 69 price changes recorded during the week (the highest on record since the index began in 2005), which included two bona fide price cuts (billet and rebar) and 67 increases. Not counted in our analysis is a number of offers that held still higher prices but had no takers; clearly this market is getting top-heavy. While we do see some nominal weakness in global pricing, we suspect it will be short-lived, and any weakness may even miss the U.S., where pricing has continued to play catch-up. The rationale for higher pricing is profound; because China is now 60% of the global steel market and is the region most impacted by global raw material price increases, China has created a "cost umbrella" for the rest of the world. China is able to pass through these cost increases into its highly protected market in the form of higher prices; and Chinese prices, the most quoted in the world, have become "global reference."

China Takes Pricing Lead; Hot-Rolled Coil Strengthens

: China led this week with 12 price increases, followed by East Asia with 10 and the CIS with seven increases. Italy recorded six increases, while India and the U.S. both logged five; Europe and Turkey had four increases apiece. Argentina and Brazil both had three increases each while the Middle East, the UAE and the U.K. all posted two increases apiece. Iran and North Africa each recorded a single increase. The two decreases in the week were in India and the Middle East. Product strength remains consistent, with hot-rolled coil (HRC) leading with 14 reported increases, followed by rebar with 12 and cold-rolled sheet with nine increases. Billet and coated sheet each logged six increases while plate and wire rod both had five. Merchant bar had four, energy pipe recorded two increases and non-energy pipe, SBQ, silicon electrical steel and tinplate posted a single price increase apiece.

Domestic Relative Prices Continue to Decline

: It remains difficult for domestic steelmakers to keep up with escalating offshore prices, so on a relative basis, domestic prices continue to decline as compared to most global peers. U.S. hot-rolled is up 6.2% so far this month, marginally ahead of Japan's 4.6% increase, but behind China's 9.9% increase and barely a third of Europe's sizable 18.3% increase. Domestic plate prices have risen 4.9% so far this month, but are down relative to China and Europe, up 5.9% and 6.6%, respectively. U.S. beam prices are up by some 7%, beating Japan's 4.1% increase, but short of China's 8.5% increase and Europe's hefty 19.3% gain. Domestic rebar is up a healthy 12.9%, outpacing Japan's 5.5% and China's 11.4% but trailing Europe's 17.0% increase.

Outlook

: While we remain concerned about domestic restarts tipping the balance of supply and demand, the strength offshore will likely absorb any production increases in the U.S.; domestic prices continue to rise rapidly but still are falling behind global trends. We expect to see fewer imports and more exports in coming months drive domestic prices still higher.

Michelle Galanter Applebaum spent more than 20 years as a managing director at Salomon Brothers in New York and was the No. 1-rated steel analyst from 1988-2003, according to Institutional Investor magazine. In 2003, Ms. Applebaum formed Steel Market Intelligence, a 5-person Chicago-based equity research boutique providing advisory services to institutional investors. In addition to publishing 10-15 reports/week, Ms. Applebaum sponsors numerous CEO-level meetings for her investor clients during the year. She is regularly quoted on Bloomberg, Dow Jones, The New York Times and makes frequent appearances on CNBC and other news programs. Ms. Applebaum lives near Chicago with her husband, visiting children and 2 dogs.