Timna Tanners: “New Normal” Range for Hot Rolled Coil = $450 to $580

“In this note we analyze the marginal costs of U.S. production for benchmark sheet hot rolled coil (HRC), looking at the divergent costs of integrateds and mini-mills into 2015E to conclude a viable forecast range assuming oversupply or balanced mkts [markets]. This bottom-up analysis keeps iron ore prices flat and assumes different scrap selling prices relative to the historical 2.8x ratio. It assumes integrated costs at $580/short ton and minimill costs at a $175/t premium to scrap costs. In addition we look at a bottom-up importing mill cost of $350/st for a delivered price of $450/st.”

The note goes on to point out that the recent approximately $100 per ton or 33 percent drop in scrap prices is going to be reflective of a “new normal” for scrap which would give the mini-mills (Nucor, SDI, NLMK Indiana, NorthStar Bluescope,SSAB) an advantage over the integrated producers (US Steel, ArcelorMittal, AK Steel, Essar Steel Algoma).

Tanners, who has been the number 1 rated metals and mining analyst by Institutional Investor over the past two years, has pegged the “new normal” range for hot rolled coil to be $450 per ton on the low end. The low end is supported by foreign steel import offerings coupled with the mini-mill cost to produce which she calculates to be scrap costs (approximately $250 per ton) plus $175 for conversion = $425 per ton.

Tanners believes the upper end of the range for 2015 to be $580 per ton or the integrated producers marginal costs to produce HRC.

Note: Marginal costs do not take into consideration overhead, R&D and other associated costs. Marginal costs also do not account for a margin for the producing mill.

The numbers referenced above represent the opinions of Timna Tanners and other analysts may have differing views based on their models for each steel mill. At SMU we use $150 above prime scrap (which right now is in the $255-$260 range) to get the marginal cost for the mini-mills to produce a hot rolled coil. This is based on comments made by Keith Busse when he was the active CEO of Steel Dynamics.

Timna Tanners will be one of our featured speakers at this year’s Steel Summit Conference on September 1 & 2, 2015 in Atlanta, GA.