Dissecting the Surge in Steel Prices

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 (MT) 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.