By Raul de Frutos
The Raw Steels MMI held steady at 47 this month. Although international steel prices remained depressed in January, domestic prices drew a different picture.
US Mills Increase Prices
US steel mills began raising prices in December, leading to higher domestic prices in January. Domestic supply had declined significantly in 2015, with capacity utilization close to 60%.
At the same time, with the uncertainty regarding anti-dumping actions, finished steel imports have slowed.
Finally, steel companies' shipments were impacted over the past few months as service centers focused on destocking and now that inventory has finally come down, service centers will finally need to start restocking activity. This combination of factors left US mills in a sweet spot in 2016 to increase prices.
Domestic prices might continue to rise in the coming weeks. After the huge price slump in 2016, domestic prices deserve a bounce in Q1. However, mills won't likely succeed in raising prices for too long.
The world remains oversupplied and demand is weak. Due to the political backlash from job losses spurred by mill closures, China wants to keep its mills running. With the ongoing Chinese yuan devaluation, Beijing has made its intention clear. China wants its exports even more competitive in global markets, especially in the steel industry as China continues to seek home for its excess of steel.
If domestic prices stayed higher, that would attract more imports resulting in more material coming into the US and depressing prices as a result. In addition, it's hard to imagine steel prices bucking the falling trend across the industrial metal sector. It will be hard for US mills to convince buyers to pay higher prices while commodities nearly universally fall.
Falling Raw Material Costs
Another important factor that will keep a lid on steel prices is the slump in input costs. In January, oil prices fell below $30/barrel. Falling energy prices will cause companies in the energy sector to reserve capital to keep on their balance sheets, rather than spending money on new exploration. This will continue to hurt steel demand from the energy sector. At the same time, while raw material prices keep falling, it will be difficult for US steel mills to justify their price increases for long.