New HRC index shows 3 reasons customers in US South pay less
Steelmakers in the United States reportedly are charging customers less in the South and more in the Midwest mainly due to three factors: differences in import penetration, end-market demand and cost structure, according to market participants — a disparity highlighted by Fastmarkets’ new index for the southern region
The new weekly South HRC index — which launched on Wednesday January 4 — will complement Fastmarkets’ existing daily Midwest HRC index and track these regional cost differences for the benefit of buyers. The index was launched in response to market participants regularly reporting these regional price disparities.
“There are times it’s a $20-30 per short ton [$1.00-$1.50 per hundredweight] difference in base prices [between the two regions], and I’ve seen it go more than that,” a southern distributor told Fastmarkets last fall.
The inaugural index calculation for South HRC was more than $2 per cwt lower than Midwest HRC.
Fastmarkets’ weekly steel hot-rolled coil index, fob mill US South was calculated at $34.94 per cwt ($698.80 per ton) on January 4, 5.72% lower than the daily steel hot-rolled coil index, fob mill US Midwest of $37.06 per cwt on the same day and 2.76% lower than the Midwest index average of $35.93 per cwt for December 29 through January 4.
Inputs for the South HRC index were received in a range of $33.00-37.50 per cwt, including deals at the low end and an offer at the high end.
1. Imports into the South arrive from many different suppliers
Several of the nation’s largest ports are in the South, including the Port of Houston — a major steel hub that attracts imports from a range of nations — which may put more pressure on domestic mills compared to the Midwest.
“The South is trading lower from what I can tell because there’s more pressure [from imports] down here,” a second southern distributor said. “Mexican mills are doing OK, there’s still some pressure from Europe, downstream products can come from Brazil now — Houston is very much affected by that, so mini-mills have to adjust [to compete with lower import prices] and that keeps a lid on [domestic price levels] down here.”
The impact of easy access to competitive imports may factor more dramatically into long-term regional price differences than recent numbers because imports have not been able to compete with falling domestic prices in recent months, a third southern distributor noted.
“Imports come into bigger play when domestic is tight and domestic mills don’t want to sell to smaller guys who don’t have contracts, but that hasn’t been the case over the last year,” he said.
Both the Gulf of Mexico and barge transport on the Mississippi River also provide South mills with access to competitively priced raw materials, another source noted.
Hot band imports to the US increased by 3.13% in November 2022 compared with October, but were still down by 48.38% compared with November 2021 volumes, according to government data.
Hot-rolled coil prices in the US are typically the highest in the world, making it an attractive market for importers. Fastmarkets’ daily steel hot-rolled coil index, fob mill US was $36.57 per cwt on Monday January 9 ($731.40 per short ton). That’s in comparison to steel hot-rolled coil index domestic, exw Northern Europe at €707.50 per tonne ($689.53 per ton) on Monday and steel hot-rolled coil index export, fob main port China at $620 per tonne ($562.46 per ton) on the same day.
The US imported 9.25 million tonnes of hot-rolled, cold-rolled and coated coil products in 2021, of which 1.22 million tonnes came through Houston, according to data from the US International Trade Commission’s Interactive Trade Dataweb. The top port of entry in 2021 was Detroit with 2.21 million tonnes of those products. However, 99.29% of those tonnes into Detroit were shipped from Canada, while flat steel products entered Houston from diverse origins.
2. Automotive a key difference in regional mill strategies
Midwestern mills are more driven by automotive contracts than their southern counterparts, decreasing their need to be as competitive in the spot market, the third southern distributor source said.
Automotive companies represent the largest portion of flat-rolled steel buyers and rely on contracts rather than the spot market.
Thus, manufacturers in the South — where automotive manufacturing and the related large-scale contracts are traditionally less prevalent — may have more incentive to remain aggressive in the spot market, according to the third distributor source. Further, the oil and gas sector is a primary end market in the South, and prices for those steels are often lower, he said.
“You’re more likely to get better value out of your steel selling automotive or downstream than in the South — at least in Texas — where your biggest industry is oil and gas, which can be more competitive,” the third distributor said. “Automotive steels are a lot more particular than oil and gas, so that plays in line [with lower prices in the South].”
3. Higher mill overhead in the Midwest
“Southern mills may have different cost structures than midwestern mills,” according to Fastmarkets analyst Kim Leppold.
“The Midwest mills have a mix of electric-arc furnace (EAF) and blast furnace mills,” Leppold said. “The South only has the EAFs, many of which are newer or built relatively recently. This could provide a differing cost structure — such as energy, reductants and freight — and as such a potentially differing pricing drivers.”
Indeed, scrap-based EAF production is “flexible, energy efficient and has lower labor costs,” according to Philip Bell, president of the Steel Manufacturers Association (SMA).
“They also have better control over raw material inputs because many EAF producers own scrap companies,” Bell told Fastmarkets.
The conversion cost from No1 busheling scrap to hot-rolled coil is approximately $170-180 per short ton for an EAF, but as high as $250-280 per ton for a blast furnace, according to Fastmarkets sources.
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