What's the Mood Among Steel Suppliers?

Last month, I had the opportunity to attend the American Metal Market and World Steel Dynamic’s Steel Success Strategies conference in NYC. Attendance leans very heavily towards suppliers (I’d ballpark it at about 70-80% of the attendees). But for all of us - from buyers and suppliers to consultants and media - the views expressed on the current state of the steel market and the direction the industry is heading was very revealing.

A series of live audience polls did a great job of capturing the mood among attendees. So let me go through some of the key questions, results and what I believe those results reveal:

• What do you think the Hot Roll Steel export price will be by the end of 2008? (Compared to the current price of $1,100/ton)
  • Up more than 10% (9% of responses)
  • Up 5-10% (24%)
  • Flat (28%)
  • Down 10-20% (32%)
  • Down 30-50% (7%)

My take: Not too surprising to see a lack of consensus here, given the conflicting reports out there. Steelmaking raw materials are still going way up (recent iron ore contract settlement between Rio Tinto (RTP) and Baosteel in China ended up with an 85% increase compared to the previous year’s contact price for iron ore). However, others feel like prices have reached a saturation point, at least in terms of profit margins. I’m still leery of saying prices will be falling substantially, but the jury is still out. I think there’s enough of a shortage of finished steel and a lack of imports to say prices will be resistant to fall too much.

• Who will be the main steel exporter to the US in the future?
  • Russia (16%)
  • China (29%)
  • Japan/Taiwan/S. Korea (10%)
  • EU (4%)
  • Brazil (34%)
  • Other (6%)

My take: A little surprising to see Brazil so high, but it make sense considering China’s government is acting so strongly to keep their steel in-house by restricting exports (in the form of taxes/tariffs). I still think China will be the largest exporter to the US just based on the sheer size of their production levels (currently 1/3 of global procurement and consumption), and because they will continue to be a net exporter for years to come.

• What single factor contributed the most to steel mill profits rising sharply since 2003?
  • Booming Chinese economy (47%)
  • Weak US$ (9%)
  • Steel mill concentration (40%)
  • Cost cuts (1%)
  • Bush’s trade policies (4%)

My take: This data, more than any other, shows the skew from a supplier-heavy group of responders. The mill concentration is having a minimal impact on profits compared to other factors. The enormous spike in Chinese demand of all raw materials caused the costs to jump, and the mills added strongly to their margins along the way. Additionally, a weak US$ is keeping imports out, which is allowing US mills to keep prices very high.

As for the impact of steel mill consolidation, despite Mittal’s (MT) purchase of Arcelor (#1 buying #2), the top 10 global steel producers still account for less than 28% of global steel production. The consolidation may have an impact on local price (if there aren’t other players in the local market), but the industry is extremely fragmented. On the whole, I think mills are giving their M&A efforts too much credit for their profits. And US mills are just benefiting from issues beyond their control (mostly China’s explosion and the weak dollar).

• Will the steel industry be as profitable in 3 years as it is today?
  • Yes (48%)
  • No (52%)

My take: If that doesn’t perfectly frame the uncertainty in the market…I don’t know what does. Although the market will likely continue to be profitable for suppliers, I have a hard time imagining a scenario where the current ramp up in profits (and of course, prices) is sustainable.

Comments

[User 127656:]

Has anyone looked at world supply of Iron Ore and the potential of added cost of production as supply dwindles?

2008 Jul 21 12:44 PM

[71743:]

When the dollar strengthens and when high strength expensive alloy demand weakens (offshore deep water oil rigs, armor plate for massive USA, European, Chinese new military products, all old and new equipment, that protect from crazy roadside bombs) will the profits slow. Keep in mind that 1.5 billion Chinese are buying their first car and producing 1/3 of all steel production. They are building 10 cities the size of Detroit from scratch needing raw material and equipment that only developed European, Japanese, US mfrs can produce in mass to get needed minerals mined out of the ground and CAT like equipment to build roads. India and China are going through an industrial revolution similar to what we went through in the 1890's and if I am correct, Andrew Carnegie did quite well.

I see the steel market remaining very profitable as US Mfg exports increase on heavy equip that offsets housing and auto slump in sales. Steel is sold in tons and a tractor and bulldozer has more tons than an Chevy Geo compact car. It is going to last for another 1-2 yrs minimum and the dollar will have to increase in value by 30% prior to the US steel producers having issues with import threats. Imports are 30 million tons per yr by NEED as US producers can only produce 100 million tons for a 130 million ton demand during normal times. Although GM, Ford are hurting, Deere, CAT, Terex, Manitowoc, Case are not by any standards. Export order books are typically 10% max and are now 30-40% of backlogs. The statebird in Dubai is the ''Crane''.

2008 Jul 24 04:16 AM