Steel Price Hikes Continue: China Leading, But the West Will Follow

Includes: MT, NUE, X
by: Michelle Galanter Applebaum
Baosteel Increasing February Sheet Prices
According to press reports, China’s price leader Baosteel announced a planned 5% price increase on flat-rolled steel for February shipments, marking the third consecutive monthly rise. With January hikes now sticking well, we expect to see further price increases announced in China as well as Europe and the US. Chinese steel demand is profound, and rising raw material costs (spot iron ore is hitting new all-time highs) are driving an inflationary spiral in the region as steelmakers and their customers clamor for material.
US Prices Running Despite Weak Demand
Prices in the US – and the rest of the world - will follow, despite virtually no improvement in demand. First quarter domestic steel prices are heading up again as indicated by multiple announcements last month and we expect to see the major domestic mills informing their customers of new hikes in the coming days. Increases are supported by near-record low relative prices in the US as well as low inventories, surging raw material costs and seasonal factors.
The Empty Supply Chain Exacerbates Volatility
Inventories – at the mill, distributor, and consumer level – normally cushion the impact of these types of swings in global prices or raw materials – as well as seasonal swings, supply chain disruptions, and other nominal increases in orders. Because the supply pipeline is so empty and lead times for production increases aren’t instantaneous, the pricing environment is being whipsawed. Last summer, sheet prices ran up a whopping 40% from July to October with a pickup in the domestic operating rate from an anemic 47% to a sickly 62% - hardly a full enough market to get any price increase in historical terms! It’s the smoke that is driving the surge, not even fire.
“Scarcity Signals” Contributing to Momentum
There have been what we call “scarcity signals” in the domestic and global food chain since late November. Even at far less than a full capacity operating rate for the global sector – with plenty of idle capacity – mills are unintentionally sending a message to their customers that they’ve become more full the past month or so by renegotiating existing pricing commitments, slowing deliveries, pushing out schedules, etc.
Steel Pricing Inelastic – Lead Times a Barrier
One artifact of the 30-year drought in the steel business is that the cost of steel as a percentage of the finished products made out of steel is relatively small. Steel cost was 10% of the car’s selling value in 1981 for instance; today it’s around 3%. So availability becomes far more important than pricing.
This is the New Normal
The net result of a combination of bare-bones inventories with these occasional demand upticks is likely to bring us to a permanent new normal of oscillating steel prices in cycles far shorter than we’ve seen in the past. This means more volatility and in some ways more opportunities for those who trade either commodity steel or steel equities. However, this is meaningfully unhealthy for the domestic and global steel industry as it will wreak havoc on steel prices and costs as well as production schedules, corporate forecasting, and ultimate industry profitability and financial health.
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