U.S.-China Steel Price Spread At Multi-Year Low, Here's How To Play It

In a new report, J.P. Morgan analyst Michael Gambardella takes a look at the shrinking U.S. price premium on steel versus China. According to the report, the hot-rolled coil (HRC) spread has dipped to only $54/ton, its lowest level in three years.

“The main drivers of the narrowing are higher Chinese steel prices, which reflect a pickup in demand and lower supply with low steel output and inventors levels,” Gambardella explains.

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The U.S./China HRC spread was as high as $233/ton as recently as 2014. Chenese steel prices have spiked 33 percent in the past week from $300/mt to $400/mt. A pickup in Chinese steel demand and improving sentiment are the primary reasons for the spike. In the U.S., J.P. Morgan expects that steel prices will continue to climb throughout 2016 due to domestic supply cuts and reductions in imports.

Gambardella notes that, since China accounts for about half of global steel production, rising Chinese prices are certainly a boost for U.S. producers. However, he adds that high Chinese prices are not a critical part of the bull thesis for U.S. producers.

J.P. Morgan names United States Steel Corporation X, AK Steel Holding Corporation AKS, Steel Dynamics, Inc. STLD and Nucor Corporation NUE as its top steel stock picks.

Disclosure: the author holds no position in the stocks mentioned.