One of the indicators we have been discussing and following closely is the price differential between domestic prices and the China export price. The China export price can be used as a proxy for the Southeast Asia price as well as a driver of the world price. Movement in this differential has implications for domestic import trends. We want to revisit this indicator within the backdrop of the recent escalation of the trade war by the Trump Administration. The chart below shows the differential, which is the difference between the Midwest HRC price and the China export price, including transportation costs.

Since the differential bottomed at the beginning of July, domestic HRC spot prices have rallied approximately $100/st, while the China export price has fallen $12/st. As you can see, the current differential is nearing its long-term average of $80. A price differential above this historical average signals that domestic pricing is high enough to encourage imports.

The Trump Administration’s recent proposed increase in tariffs on Chinese imports has rattled global financial markets, and may have implications in the steel market and global trade flows. The primary impact is taking place in the currency markets as the US dollar has strengthened to the highest levels of the year, and the Chinese government has set the Yuan at the weakest levels of the last few years. These movements in the two currencies make importing goods, including steel, more attractive. Moreover, the strong US dollar is a headwind for metals prices broadly, and as such, is identified as a downside price risk. Additionally, the weakening economic conditions in China may incite the government to implement stimulus measures. While recent data has yet to show this change in policy, there is historical evidence that this is likely based on the slowing Chinese economy. The Trump Administration has recently discussed fiscal stimulus measures such as tax cuts, and it continues to pressure the Federal Reserve to provide more accommodative monetary policy. These stimulus measures out of both or either country would be supportive of steel prices.

However, changes in trade flows and governmental stimulus efforts take time to affect markets, and would not influence the domestic steel market for several months. We believe the more pressing dynamic in the domestic steel market is the expected lower levels of imports, along with planned mill outages, in the months ahead.