Before the global coronavirus pandemic, the US steel market tended to operate within its own bounds of normalcy. Price spreads between certain finished steel products and raw materials usually held some sort of rangebound level but not immune to a temporary macroeconomic catalyst skewing levels to the extremes. Even past markets where spreads became more pronounced, think tariffs in 2018, now pale in comparison to the current post-coronavirus US recovery.
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In the US, where more than 70% of steel produced comes from electric-arc furnaces much of the focus on spreads between ferrous scrap and finished steel. In the case of sheet mills, No. 1 busheling compared to hot-rolled coil is the most important raw material to finished steel spread. It is a good proxy for mini-mills' raw steelmaking margins, without accounting for labor, energy and others costs.
The year-to-date spread between the average of HRC and No. 1 busheling is at approximately $843/short ton, which is a 172% increase over the average going back to 2011. The current spread is more than 75% higher than when it ballooned in 2018. At the time of the previous record spread in 2018, a scrap market source described the pricing environment as the domestic mills having a frat party, while scrap dealers were having a picnic.
Scrap dealers are benefiting from higher scrap selling prices in the US compared to the 2018 cycle but are still unable to keep up with runaway finished steel prices for sheet products.
Within finished steel markets in the US price spreads are also out of whack with more historical levels, causing demand substitution. In the plate market, prices usually carry a premium to HRC. This is important as certain plate mills do not have dedicated plate melt shops and must divvy up semi-finished slabs with their sheet-mill counterparts. A premium price for plate products helps ensure more slabs are allocated. In addition, it gives other plate mills less incentive to sell lighter gauge plate in coils that can work for HRC applications.
The spread between the two products has always been volatile with the average Platts plate price for 2016 at just a $23/st premium to the HRC average for the year. However, in 2011 the premium was as high as $269 based on the two products annual price averages.
Despite the volatility, the very rarely violated rule of thumb that plate prices traded to a premium for HRC remained. Again, post-coronavirus recovery has completely bucked the trend with year-to-date average plate prices at a $160 discount to HRC prices.
Plate prices have continued to move higher but most market sources attribute it to the lack of availability given mills focusing on sales into the HRC market due to the significant premium.
One spread still holding some semblance of normalcy has been the cold-rolled coil premium to HRC. Year to date, the average US CRC price has traded at a premium of $180 compared to HRC. This is still in the higher-end of the historical range with the spread maxing out in 2016 and 2017 $192.
Still, many market participants considered the "normal" price spread between the two products at $100-$125. This is based of how the market traded before 2016. Since then the annual averages of the two products spread has been above $150, except for 2018.
It is yet to be seen if it will last, but the spread has been widening back since the beginning of June toward new highs, with levels exceeding $200 since June 4 and at $232 on June 10.
Most market sources aren't ready to call these levels a new normal. In the same vein as the inflation talk in the US, these extreme spreads may just be transitionary. Supply chains should be able to normalize next year as more steelmaking capacity comes online and lead times retreat. In addition, raw material demand for scrap is set to increase with new EAF production in the US and potential Chinese demand. So as the market transitions from its post-coronavirus price surge it there may be more lasting changes to what is considered "normal" in the market.