Have you ever wondered how steel prices are determined? If you've ever given it any serious thought, you'll soon realize how complicated of a process it is. From calculating the cost of raw materials and transportation to analyzing supply and demand and global industry trends, establishing a benchmark to measure current and future prices against isn't exactly a walk in the park.
Thankfully in 1969, a group of industry professionals - ranging from financial analysts, economists, data scientists, and market researchers - decided to begin an independent commodity research company known as Commodities Research Unit (CRU). This group would go on to develop what is now known as "the CRU," saving us all in the metals industry a world of headaches when it comes to establishing a benchmark to measure steel prices against.
What is CRU?
Though sometimes used interchangeably, the abbreviation "CRU" and "the CRU" mean different things.
As mentioned earlier, CRU stands for Commodities Research Unit. Though originally a copper research specialist, the CRU is now a globally-renown commodities research and price-reporting agency (PRA) that assesses a variety of different commodities through market research and analysis.
Through their research, the company provides global economic price assessments for the metals, mining, and fertilizer industries by collecting and analyzing industry-specific data from across the globe. Their assessments most notably serve major mining, trading, manufacturing, construction, and financial services companies worldwide.
What is the CRU Index?
"The CRU," more formally known as the CRU Index, is the most established and trusted price benchmark in North America for U.S. Midwest Domestic Hot-Rolled Coil Steel (HRC).
In technical terms, the CRU Index is a segmented stock market index that helps investors track steel performance by comparing current steel price levels with past steel prices to calculate future market performance.
In fact, the CRU index is used as a settlement price for the Chicago Mercantile Exchange's (CME) US Midwest domestic HRC futures and options contracts and is referenced in over 95% of physical contracts for hot rolled coil in the U.S. market.
These contracts allow prices to be managed separately from physical steel supply for the current year and the following two calendar years, providing buyers and sellers a central point for price forecasting, discovery, transparency, and risk management.
Ultimately, the CRU index helps those across the entire steel supply chain, from global investors and analysts to mills and service centers, manage their businesses by having a trusted steel price benchmark to use when purchasing and selling steel.
How is the CRU Index calculated?
Just like any other commodity, the price of steel is essentially determined by market supply and demand. In other words, it's about understanding how much steel is available versus how much is being bought on a large scale. Unfortunately, this type of information isn't the easiest to access or analyze, for that matter. That's where the CRU Index comes in.
To calculate the CRU Index, CRU partners with a mix of vetted steel mills, service centers, and manufacturers to collect transactional data on a weekly basis through their CRU price collection platform (CPCP). The price is developed using only actual transactions on a Free On Board (FOB) mill-basis at a volume-weighted price.
Once collected, the data is reviewed and put through a rigorous process to create an up-to-date price assessment. The price comes out every Wednesday at 8 AM (CST) and reflects the business done during the Sunday to Saturday week before.
For the weekly CRU Midwest Hot Roll Coil assessment, the company only considers spot prices for U.S.-made, prime, hot rolled coil measured per US ton. There are no bids, offers, or opinions taken into account during the calculation.
Here is a breakdown of the CRU's price assessment process:
- CPCP Checks: The CPCP opens first thing on Friday and closes Monday at midnight (CST). As data comes in, a price analyst begins reviewing, spot-checking, and investigating any potential errors or outliers.
- Initial Calculation: On Tuesday, the data is sent to the London headquarters, where it is further reviewed and processed by senior data managers. The data is then used to create an initial calculation, which is then sent to a principal analyst for final assessment.
- Analyst Review: Once the analyst receives the initial calculation, they establish a range reflective of the current market - as prices are submitted, any prices in this range are automatically included.
- Verification & Final Calculation: Once all the prices are in and run through various spot checks, the principal analyst oversees the final calculation to include all prices representative of the market.
Steel Market Prices vs. Steel Product Prices
Steel market price refers to the overall cost of steel in the global market, which is influenced by a variety of factors such as supply and demand, production costs, and economic conditions. Steel product price refers to the cost of a specific steel product, such as a steel beam of a particular grade and size.
The price of steel products can be influenced by the market price of steel as well as additional factors such as the cost of production, transportation, and distribution. Additionally, steel prices today regarding individual products can be different between regions and suppliers and may depend on the volume and type of the order.
Unless you're an economist, market analyst, or day trader, chances are you won't be too concerned with monitoring larger-scope market prices. In other words, while an economist may be studying the global price fluctuations of iron ore, a service center or manufacturer will be far more concerned with using market pricing to determine fair contract negotiations when sourcing steel from a mill.
As a buyer, it's essential to remember that while a correlation does exist between the larger-scale market price and downstream steel material prices, the two will never be the same. Just like the price of flour may influence the price of bread, it does not determine the final cost - the same goes for hot rolled steel coil. The farther down the value-added stream you go, the more factors (e.g. labor, energy, and transport costs) will influence the final price.
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Steel is one of the most important metals used worldwide in the construction and engineering industries. This guide will explain what steel is, what drives its price, and what experts have to say about this ubiquitous metal.
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Why is Steel Valuable?
Steel is an alloy made up mostly of iron and containing smaller amounts of carbon, manganese, silicon, phosphorus, sulfur and oxygen.
Its relatively low cost and strong physical properties make steel a popular choice for fabricating a wide variety of items. Consumer durables such as refrigerators and washing machines use steel, as do items ranging from cargo ships to buildings to surgical equipment.
How is Steel Produced?
Steel production takes place in furnaces using the following three different methods.
Blast Furnace – Basic Oxygen Furnace (BF – BOF)
This method uses iron ore, coal, and some recycled steel. Iron ores are reduced to iron and then converted to steel in blast furnaces. Steelmakers cast and roll the steel and deliver it as coils, plates, sections or bars. The BF – BOF method accounts for about 75% of global steel production.
Electric Arc Furnace (EAF)
This method uses mostly recycled steel and electricity, but sometimes other sources of metallic iron. Electricity melts recycled steel in EAFs, which account for about 25% of global steel production.
Open Hearth Furnace (OHF)
This energy-intensive and environmentally unfriendly method accounts for less than 0.5% of global steel production.
Global steel production exceeds 1,600 million metric tons annually. Production is global, but it has shifted dramatically over the past decades from Western countries to China. Chinese producers now account for almost half of the global supply of steel.
Top Steel Producing Countries
Main Uses of Steel
Demand for steel has climbed steadily over the past few decades as emerging market economies developed larger infrastructure needs. China uses 45% of annual steel production, while other Asian nations use nearly 17%.
The EU accounts for a little over 10% of annual steel demand, and NAFTA countries comprise close to 9%.
The following industries comprise most of the demand for steel:
Uses of SteelDescription Construction and Infrastructure
Builders and engineers use steel to construct high-rise buildings, industrial sheds, residential buildings, bridges, parking garages, rail lines and other structures.
Construction and infrastructure account for about half of the annual steel consumption globally. Mechanical Equipment and Automotive Sector
Steel sheets are used in vehicle frames, hoods, doors, mufflers, bumpers and fuel tanks. Specialty steel is used in engine parts, transmissions, and suspensions. These sectors account for about 30% of annual steel demand. Metal Products
This sector includes consumer goods such as refrigerators, washing machines, and air conditioners and accounts for about
11% of annual steel demand. Other Transport
This sector includes shipbuilding and trains and comprises
5% of annual global steel demand. Electrical Equipment
This sector comprises about 3% of global steel demand and includes connector and component brackets and other equipment. Domestic Appliances
Knives, cookware and other small kitchen appliances use steel. This sector accounts for about 2% of annual demand.
What Drives the Price of Steel?
Diverse industries all over the world use steel in their products. Therefore, the price of steel is a good barometer for global economic strength. The following five areas represent important specific determinants of steel prices:
Chinese Economy
Global Infrastructure Demand
Transportation Demand
Input Prices
Substitution Costs
Chinese Economy
China uses about half of the annual global supply of steel and, therefore, may be the biggest determinant of steel prices.
Double-digit growth in Chinese GDP over the past decade has created robust demand for steel in office buildings, residential housing, infrastructure and other types of construction.
However, China is also a major exporter of steel. As its growth trajectory has slowed, Chinese demand for steel has waned. Chinese producers have flooded international markets with cheap steel exports and depressed prices.
Ultimately, strong internal Chinese demand generally creates higher steel prices, while weak demand leads to oversupply on the global markets and lower prices.
Other Economies
To a lesser extent, demand from other emerging economies such as Brazil and India also impacts steel prices.
Global Infrastructure Demand
Construction and infrastructure represent a very large percentage of steel demand. Mature economies including the United States is planning large-scale infrastructure projects to replace crumbling bridges, airports and transportation systems.
The demand for such large-scale projects in major Western economies can drive steel prices higher.
Transportation Demand
Demand for ships, trains, and cars impacts the price of steel. When the global economy is strong, the need for ships to transport cargo grows. Similarly, a strong global economy creates increased consumer demand for automobiles.
Ultimately, the transportation sector is a very reliable barometer for the overall economy, so economic strength helps the price of steel, while economic weakness depresses it.
Input Prices
Scrap metal and iron ore are the two main materials used to produce steel. Emerging economies China, Brazil and India provide much of the global supply of these materials, and they also have large-scale steel production industries.
The global availability and cost of these materials may depend on the size of the domestic demand from these countries.
Energy Costs
Energy costs are another important input cost of making steel since the heat needed to melt iron ore is significant.
Substitution Costs
Advances in technology have produced strong composite materials that compete with steel. Carbon fiber reinforced polymers, for example, have properties including strong strength-to-weight ratios that make them suitable substitutes for steel in many applications.
Further improvements in composite technologies could lessen demand for steel.
What Do the Experts Think About Steel?
Industry experts are divided about the prospects for steel prices over the coming years.
Visiongain
A report by Visiongain states that oversupply of steel will impact the market for the next decade. The report cites resistance by China to cut production levels combined with declining demand from the rest of the world.
Lourenco Goncalves, Mining Company CEO
A leading mining company concurs with this view:
China (has not been unfairly targeted). They are the perpetrator, they are the problem and they had a chance to discuss this within the OECD (Organization for Economic Co-operation and Development) and they elected not to participate…China has been walking away from a negotiated deal.
Lourenco Goncalves, chairman and CEO of Cleveland-Cliffs Inc.
Goncalves also blames India, Taiwan, Italy and South Korea for contributing to a global glut in steel.
Merrill Lynch Research Report
Other experts, however, see reasons to be bullish on steel:
A Merrill Lynch research report cites three positive catalysts in China that should contribute to higher steel prices:
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