Steel Spreads: Why Subtracting Iron Ore Prices from Steel Prices Is Not Enough
Compare steel selling prices and raw material input costs on a consistent unit basis. Examine furnace routes, inventory lags, product mix, and utilization to understand their effects on actual earnings.
A steel spread measures the difference between product selling prices and major raw material costs; it is not an operating margin. Blast furnaces and electric arc furnaces use different inputs, and input quantities, exchange rates, and inventory lags make simply subtracting iron ore prices per tonne from steel prices per tonne inaccurate.
Align steelmaking processes and raw material units
The World Steel Association's raw materials explanation distinguishes inputs for the blast furnace–basic oxygen furnace route from those for the electric arc furnace route. For the blast furnace route, examine iron ore and metallurgical coal, among other inputs; for electric arc furnaces, examine scrap, direct reduced iron, and electricity. One tonne of raw material does not correspond one-for-one to one tonne of finished product. Calculating raw material costs per tonne of product requires input quantities, yields, by-products, and sourcing terms. When comparing KRW product prices with USD raw material prices, also align exchange rate and freight cost assumptions. If a company's specific input coefficients are undisclosed, do not treat industry averages as its definitive costs.
Current market prices reach reported costs with a lag
Ordering, transporting, and storing raw materials, then making and selling finished products, takes time. Even if recent iron ore prices have fallen, cost of sales may reflect expensive inventory purchased earlier. Selling prices may also adjust at different times from spot prices because of long-term supply negotiations or contracts. A wider spread today therefore does not mean higher profit this quarter. Compare actual realized prices, input costs, and inventory turnover commentary for the same period. If inventory write-downs or reversals occur, read them separately from profit generated by changes in market prices and production efficiency.
Product mix and utilization explain the remaining differences
Prices and raw materials differ by product mix, including plate, hot-rolled steel, automotive sheet, and stainless steel. POSCO Holdings' official earnings commentary discusses utilization and cost competitiveness alongside selling prices. Even when the product-to-raw-material spread improves, lower sales volumes can increase the fixed cost burden, while scheduled maintenance, energy costs, and depreciation also change operating profit. Use spreads as a supplementary indicator of direction and check whether they connect directly to segment earnings. Consolidated results may include non-steel businesses, so do not attribute all group earnings improvement to steel spreads.
Worked example
Hypothetical example: If a product sells for KRW 1 million per tonne and its major raw material inputs cost KRW 600,000, the simple spread is KRW 400,000. In the next period, a product price of KRW 950,000 and raw material costs of KRW 500,000 increase the spread by KRW 50,000 to KRW 450,000. However, if energy and processing costs rise from KRW 200,000 to KRW 270,000, the amount remaining before fixed costs falls from KRW 200,000 to KRW 180,000. This illustrates why a wider raw material spread does not necessarily mean higher final profit.
What to check
- Have you aligned raw material composition and input units for blast furnaces and electric arc furnaces?
- Are exchange rate and freight assumptions consistent for USD raw materials and KRW products?
- Have you considered inventory and sales contract timing lags?
- Have you examined product mix, utilization, and energy costs together?
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.