Analysis of World Export vs. Domestic Hot Rolled Coil Price Spread

Over the past few months the trend has been for a narrowing of the spread between foreign and domestic steel. This should result in lower imports of foreign steel in the coming months. However, with the recent price announcements and increases in pricing the spread has started to widen which could pose a problem for the domestic mills should the spread get out of hand (widen too much).

The following calculation is used by Steel Market Update in order to identify the spread between world hot rolled export prices as determined by SteelBenchmarker and domestic (US) hot rolled prices determined by SMU. Steel Market Update compares the world hot rolled export price to which dollars are added for freight, handling, trader margin, etc. The number generated is then compared to the spot (FOB Mill) domestic hot rolled price using the SMU Hot Rolled Index average for this week, with the result being the spread between domestic and world hot rolled coil prices. This is a ‘theoretical’ calculation as freight costs, trader margin and other costs can fluctuate.

The world export price for hot rolled bands is $348 per net ton ($384 per metric ton) FOB the port of export according to data released by SteelBenchmarker earlier this week. This is down $5 per ton from the previous release in late-April and down $14 per ton from one month ago.

SMU uses a minimum of $70 to as much as $100 per ton for freight, handling, and trader margin, which is then added to the export number in order to get the steel to ports in the United States. This puts our ‘theoretical’ selling price for hot rolled coil exported to the United States as ranging from $418 to $448 per ton CIF USA Port.

The latest Steel Market Update hot rolled price average is $470 per ton for domestic steel; this is up $25 from late-April and up $22 per ton from one month ago. The theoretical spread between the world HR export price and the SMU HR price is $22 to $52 per ton ($122 prior to import costs), up $30 per ton from our previous analysis and up $36 from one month ago.

The $22 to $52 spread is slightly higher than the spreads we have seen over the past few months. The last time the spread was this high was in mid-January, at the exact same range. The spread in early February of -$19 to $11 was the lowest seen since late-May 2013 when we had a spread of -$20 to $10 per ton ($80 prior to import costs). In 2014, the highest spread seen was in mid-May at $84 to $114 per ton ($184 prior to import costs). One year ago the spread was $84 to $114 per ton ($184 prior to import costs).

The above numbers are based on ‘theoretical’ calculations. This is where we believe prices and price offers should be if the SteelBenchmarker world export number is correct.

What we are seeing in the “real” market are foreign hot rolled offers in the $400-$430 per ton range which is right in line with our theoretical calculation shown above. For hot rolled, steel buyers like to see a spread of at least $60 per ton before making commitments. The exception to the rule is when buyers believe steel prices in the U.S. are rising and will continue to do so for a couple of months – this makes the locked in foreign steel pricing less risky and smaller spreads may attract buyers.

Freight is an important part of the final determination on whether to import foreign steel or buy from a domestic mill supplier. Domestic prices are referenced as FOB the producing mill while foreign prices are FOB the Port (Houston, NOLA, Savannah, Los Angeles, Camden, etc.) or in the case mentioned above the Mexican border. Inland freight, from either a domestic mill or from the port, can dramatically impact the competitiveness of both domestic and foreign steel.

Below is an interactive graph which you can use to compare world HR export prices against the SMU domestic HR average price. We also have included a comparison with freight and traders’ costs added which gives you a better indication of the true price spread. You will need to read this article on our website in order to see and interact with the graphic. If you need assistance with either logging in or navigating the website, please contact our office at 800-432-3475 or info@SteelMarketUpdate.com.

{amchart id=”130″ Domestic vs. Foreign Hot Rolled Pricing- Steel Benchmarker World China Europe Prices}