Steel Report : Up, Up and Away
Home » Steel eNotes - Spring 2010 » Steel Report : Up, Up and Away
The Steel Crisis of 2004.
The Great Steel Boom/Bust of ’08 and ’09.
At the expense of sounding like a broken record, the steel market is out of control once again in 2010, and we are all paying the price, literally and figuratively.
By now steel purchasers and consumers know the drill. Prices for key steel making commodities like iron ore, coking coal, and scrap escalate globally due to heavy consumption in developing nations like China, India and Brazil. Since the global supply of these materials is increasingly concentrated in a few large, “mega suppliers”, those firms work in lock step to force up prices in a rapid and dramatic fashion.
Meanwhile, in response to, and well ahead of the actual impact on their operations, US steel producers implement monthly price and surcharge increases to “recoup their costs”, even though the most expensive raw materials have yet to hit their yards. Mild panic ensues, with steel consumers placing larger orders to try to “beat the increase”, only adding to the appearance of improving overall demand and thus emboldening mills to push for even more increases. So goes the vicious cycle.
Add in a weak US dollar which makes imported steel unattractive (and exports by US mills more viable) and you have the makings of yet one more steel boom/bust cycle. The only questions yet unanswered are, “How long does the boom last?” and “How deep will the bust be?”
There are scores of steel pundits around the world who make a living predicting the answers to the above questions. Historically, their ability to forecast accurately is specious at best, so perhaps the best we can do is try to “read the tea leaves” by evaluating the key drivers of supply and demand in the steel sector.
Global economic activity
It is hard to argue that near term economic output is improving (with the exception perhaps of the non-residential construction sector!) This increased activity has spurred manufacturers to replenish raw material stocks and to start up some idled capacity. Thus, more orders for the steel mills and an improvement in “apparent demand.”
Although some portion of current output is a function of “catching up” after a disastrous 2009, the probability of a “double dip” recession seems more remote today than twelve months ago, suggesting steel usage will continue to stabilize. Even in our battered non-res market, we are hearing anecdotally from many Aegis fabricators that “things are improving a bit” and that the second half of 2010 should be “decent.”
One wild card to keep an eye on is China. With GDP growth forecasted in excess of 10% in 2010, it is possible that central planners in Beijing will want to “apply the brakes” somewhat to prevent “overheating.” This in turn would ease the pressure on global commodities.
Raw Materials
The dust is settling on the global iron ore contract negotiations that resulted in huge price increases. Steel producers now know with some certainty what their costs will be for a period of time. Since they have already raised prices in anticipation of these increases, it is possible we will see steel “plateau”, at least for a little while.
Some evidence suggests that certain steel-making commodities are already beginning to flatten. Following massive increases in scrap steel in the December through March time frame, April prices came in a fairly modest $10 to $20 per ton higher, much to the surprise of the so called experts. This could suggest some of the “frothiness” is departing the scrap market. Time will tell.
Supply and Demand
Eighteenth century economist Adam Smith wrote in his seminal work, The Wealth of Nations, of the “Invisible Hand” of the market. As an illustration, he offered:
“It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”
Essentially, as individuals (and companies) pursue their own goals and objectives, the free market will settle on the proper levels of product distribution and price. Put simply, if steel mills continue to ramp up idled facilities, while at the same time steel consumers realize only modest improvement in their order books, “something will have to give.” Conversely, if mill capacity utilization continues to rise on the back of real and sustainable demand, steel consumers will continue to face rising prices until a new equilibrium is arrived at.
In closing, allow me to reiterate my comments from the Winter 2010 edition of Steel ENotes:
Aegis fabricators and their contractor customers can be certain of only two things:
- Steel prices WILL continue to fluctuate, both up and down
- Aegis WILL continue our tradition of clearly and proactively communicating these fluctuations and their potential impact on pricing for our products. You have my commitment on this!
Thank you for your support and business so far in 2010. We look forward to continuing our partnership with you as we move into what will perhaps be improved market conditions in the second half of the year.
