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What’s Really Behind the Steel Price Surge?

April 15th, 2008 · by Mike Petro · 4 Comments · LCCS and trade, automotive sector, sourcing, supply management

A lot of ink has been spilled in attempts to diagnose the recent run up in steel prices. Purchasing.com recently put the blame squarely on the raw materials cost push and strong global demand. Certainly raw material factors are still the primary contributor to the sharp rise in steel prices (iron ore costs up 65% year over year, coking coal costs tripling, scrap prices jumping, high energy costs, transportation vessel shortages, freight fuel charges, etc.), but I have to take issue with the idea that global demand is playing such a pivotal role. Instead, I would argue that the other primary factors influencing the run in US prices are:

  1. The weak dollar’s effect on steel imports
  2. Global consolidation in the industry

The weak dollar and resulting drop in imported steel outweigh the impacts of global demand. In fact while demand in many US industries is high, the contraction in automotive, housing and appliance sectors is keeping the overall US demand in check. Unlike the period of 2004-2005, when steel-making costs jumped AND demand spiked, this market is marked by high steel-making costs and moderate global demand. The big difference now is that domestic steel mills have been able to charge what they want due to a lack of cheaper-priced imports. In other words, the weak dollar has put the brakes on steel imports.

Global consolidation in the industry is also playing a significant part. In the past, mills stayed within their home regions whenever acquisitions were made (Asian mills buying Asian mills, US mills buying US mills, etc.). Today, global mills are very often acquiring mills in different parts of the world.

Case in point is Mittal Arcelor’s recent success in acquiring shares in Chinese mills, which is a first for non-Chinese organizations. As other low-cost-country regions start to expand their steel production (particularly in Russia, Eastern Europe and Latin American countries like Brazil), I expect the global consolidation pace to increase. Remember, all these increases in steel prices are just building up the cash reserves for global mills to go out and acquire new capacity.

So short of a drop in raw material costs, a stronger dollar or further drop in demand (which I’m not sure many of us would wish on the US economy right now), steel buyers are at the mercy of the market forces and a consolidated supply chain for the foreseeable future. There are other strategic and process changes in the mills themselves, particularly around vertical integration, that are playing a role. But, I plan to dive into that further in a future post as well as the upcoming issue of Supply Watch.

Mike Petro is the Senior Category Manager for Metals at Ariba. Prior to that, Mike analyzed supply chain options and competitive pricing for US Steel.

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4 responses so far ↓

  • 1 Lisa Reisman // Apr 15, 2008 at 5:55 pm

    I completely agree with Mike’s analysis but would add a couple of points. In addition to the weak dollar, you have a Chinese government that has severely modified export tax rates and VAT changes which have seriously curtailed steel exports from China. You also have a far savvier “Big Steel” industry that has closely matched production to actual demand preferring the shuddering of older inefficient mills to operating at just above cost (or in some cases below cost) which used to be the operating norm. This shift, which occurred in the late 90’s is a marked change from how mills used to operate. The result – a perfect storm of price increases for steel buyers!

  • 2 Mark Segedi // Jun 9, 2008 at 2:46 pm

    I agree with some of the the comments here. 2004 not all raw materials and energy were rising, only about half of the factors. 2nd yes the weak $ has kept imports out but there is global demand that will consume the imports that the US believes to be their rights. A few years ago when Mittal appeared to “overpay” for ISG we were all shocked. Somehow I think they saw this better than the rest of us. Despite China greatly increasing capacity the US $ needed to correct itself and there would be a need for domestic mfg to purchase material from the US because the BRIC nations & Europe would soon consume their share. The one positive area I see in the decline of the US $ is more manufacturing coming back domestically to small to mid-size companies. This I believe will be further aided with the $125-250,000 expense write-off in the stimulous package. Much like the boost the US automakers recieved for the 4000# SUVs being depreciated over 5 years. Suprise that tax incentive ended last year and purchasing SUVs stopped even before the gas prices increased.

    Increased pricing is not mentally any fun but it can be focused into a great turn around for small to mid sized mfg.

  • 3 David // Jun 20, 2008 at 5:06 pm

    Most fairly fixed supply commodities are high. Oil and gold are high. This points to devalued currency. Governments have been printing money basically. Their inflation numbers are based on lagging indicators that are kept low due to market pressures until they no longer can. What you will see is that all of the sudden the indicators will jump and it will be too late to protect your already devalued life savings. Governments do not have to tax you, they just spend and print money. You suffer because of it. There is no reason not to peg the dollar to a diverse portfolio of fixed supply commodities and precious metals. If one of the items in the portfolio no longer fits, replacing it with another that does will not change the portfolio value. This is different than just backing the dollar by one thing like gold. Governments will not do this because they want full control over you.

  • 4 Supply Excellence — Steel Price Surge: Part 2 // Jul 17, 2008 at 10:55 am

    [...] week, we looked at the driving forces behind rising steel prices in the US: surging raw materials, a weak dollar and global consolidation. Those are the Big 3, but [...]

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