The status quo shouldn’t be preserved when it hurts your bottom line.
When it comes to US HRC, your decisions and operations shouldn't remain mired in an outdated pricing process - one that might be costing you, big time.
- It's time to switch to a US HRC index that’s best for you and your wallet - or at least to ask some hard questions about the one you’ve always used. In contrast to competitors, Fastmarkets’ US HRC index is:
- Tied to a higher frequency (daily) with a more extensive pricing history (dating back to 1960), giving you more confidence when it comes to decision-making and more flexibility when it comes to hedging tactics.
- Backed by an audited, transparent IOSCO-assured methodology that surveys three sides of the market: producers, distributors and consumers – not just a simple buy/sell model.
- Balanced between an objective tonnage-weighted average calculation process and expert judgment that allows the discarding of unusual transactions.
- Supported by news, daily market reports and other market-leading prices – including benchmark scrap pricing – that provide a more holistic, contextualized view of the US flat-rolled market.
How do you know when the positives outweigh the risks?
- When less frequent indices don’t reflect spot market trends, to the point where it becomes nearly impossible to explain that index’s price movements.
- When weekly benchmarks mask daily dynamics in an increasingly volatile HRC market.
- When trading partners have better pricing intelligence – and you bear the consequences.
- Or alternatively, when you see the better intel from a daily price as a potential competitive advantage.
- When, as market tensions rise, having IOSCO assurance underpinning the methodology simply makes defending tough decisions that much easier.
Below are just two examples of how using a weekly indicator, instead of a daily indicator, could have adversely affected your bottom line this year. As time goes on and these examples continue to stack up, you risk leaving more and more money on the table.
The HRC-busheling squeeze: April 30 to May 11
- Fastmarkets’ daily steel hot-rolled coil index, fob mill US fell to a four-year low of $437.80 per short ton ($21.89 per hundredweight) on Thursday April 30. The steel scrap No 1 busheling index, delivered Midwest mill, was at that time $243.65 per short ton. Let’s assume a conversion cost of $150 per short ton. That equates to a hot metal cost of $393.65 per short ton. The result: a metal margin - the difference between raw material costs and selling prices - of $44.15 per short ton. Contract business is sometimes conducted at a $40-per- short-ton discount, meaning some electric-arc furnace mills were close to their cost of production.
- The trouble started soon after. The steel scrap No 1 busheling index, delivered Midwest mill on Monday May 11 rose 13.6%, or $33.14 per short ton, to $276.79 per short ton. That equates to a hot metal cost of $426.79 per short ton. Fastmarkets’ daily US HRC price - which is nimble and responds in line with market feedback - had been moving up even ahead of the May scrap settlement. It stood at $497.80 per short ton on May 11, up 13.7%, or $60 per short ton, from the four-year low recorded in late April. Because the daily HRC price and the monthly scrap price rose in tandem, metal margins were a healthy $71.01 - wider than they were at the end of April despite higher May scrap costs.
- What would have happened if you were on a lagging weekly HRC price? Fastmarkets’ HRC index averaged $455.60 per short ton for the week ended Friday May 1, so slightly higher than the lows plumbed by the daily price that week. Good, right? Wrong. What if that weekly price had been left unadjusted despite scrap prices settling higher. Recall that hot metal costs were $426.79 per short ton after No 1 busheling settled higher. Thus, metal spreads would have been $28.81 per short ton – close to break-even on spot business and loss-making on contract deals.
Taking HRC to the bank daily: August-September 2020
- Fastmarkets’ daily steel hot-rolled coil index, fob mill US is more reflective of spot dynamics in both rising and falling markets. Case in point: US mills over the past month have announced price increases of more than $100 per short ton. During that time, Fastmarkets’ daily HRC price has consistently led weekly average prices higher. Companies using a daily HRC price would therefore have booked profits from those higher prices more quickly – and in tandem with increased scrap costs, something that would have reduced their basis risk.
- US mills announced price increases of $40 per short ton during the week of August 24. Fastmarkets’ daily HRC price was at $483.20 per short ton on Monday August 24 and had risen 3.6% to $500.60 per short ton by Friday August 27. The weekly average from the prior week - the week ended Friday August 21 - was $475.60 per short ton. If you had been using a lagging weekly average, your price would not have reflected mill increases that had begun to gain traction in the spot market. And you would have been leaving $25 per short ton on the table - not because the market hadn’t moved, but because you were using a lagging indicator.
- The same dynamic repeated itself in early/mid-September, when steel scrap, No1 busheling, index, delivered Midwest mill settled higher and when US mills announced price hikes of $60 per short ton. Scrap settled at $257.84 per short ton in September, up 11.8%, or $27.21 per short ton, from $230.63 per short ton in August. Fastmarkets’ daily HRC price stood at $553 per short ton on September 11, up 4.7%, or $25 per short ton, from $528 per short ton a week earlier - roughly matching higher scrap costs. If you had been using a lagging weekly average, you would have been stuck with an HRC price at $520 per short ton. Assuming conversion costs of $150 per short ton, a daily price would have allowed you to record a metal margin of $145.16 per short ton. A lagging weekly price would have meant a margin of $112.16 per short ton - $33 per short ton lower, or $165,000 less in potential profits on a spot order of 5,000 short tons.
The market has reached a tipping point where the risk of not switching indices outweighs the risk of doing things the way you’ve always done them. In an era of volatility and tight profit margins, you need to be able to analyze the market in real time. Fastmarkets can help you do that, so let’s talk.
Schedule a one-to-one discussion with our steel team here to ask how to reduce risk and improve your bottom line.