Surging steel prices are 'self-defeating'

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• Steel prices have risen nearly 40% since March.
• The US followed through with steel tariff threats on its allies Thursday.
• But some think prices could still drop as soon as this year.

Steel has been soaring, but some analysts think prices could fall sharply in the months ahead.

Steel prices have rallied 38% since the US Commerce Department launched a Section 232 investigation that led to hefty import taxes on the metal last year. And as President Donald Trump cuts off tariff exemptions to the US's closest allies this week, prices look poised to keep booming.

But the rally has "gone too far," according to Simona Gambarini, a commodities economist at Capital Economics.

Gambarini said prices have risen beyond what can be justified by demand and supply fundamentals. The recent rally happened largely because of supply shocks, or anticipation of them, rather than demand. And structural decline has pushed steel demand down 1% per year over the past two decades, according to UBS.

The World Steel Association said last month that global demand for the metal will grow 1.8% this year. But US activity has been relatively sluggish, according to Gambarini. Most recent demand growth was due to a pickup in housing starts, but activity in other key sectors like auto has been soft.

On top of that, higher domestic steel prices make it more difficult for US companies to compete with international producers. The price premium on US hot-rolled steel versus equivalent imports ranges from 40% to 60%, according to Capital Economics, which seems to be hurting both exports and domestic demand.

Capital Economics

Despite falling competitiveness, domestic supply of the metal is on the rise. US steel production rose 2.8% from a year ago in the first four months of 2018, along with capacity utilization levels. And with imports rising at the same time, up about 1% in the first quarter from a year ago, the US market is at risk of becoming oversupplied.

Markets Insider

"While the tariff appears to have been successful in stimulating domestic output, high prices are proving self-defeating," Gambarini said.

Capital Economics forecasts that steel prices will end the year at $700 per tonne, down 20% from current levels.