Raw Materials To Drive Steel Prices Up In The Global Market

Updated: Sep 22 2003, 05:30am hrs
With global steel production continuing at over eight per cent till August, there are reasons to reconsider some of the earlier views on the strength of the steel market around the world. While we continue to maintain that finished steel demand will remain more or less unchanged till December end to leave industry under sufficient pricing pressure, given the huge increases in input prices, the mills will be left with no option but to raise prices. It is a different issue, they will part with their potential profit or make losses if they do not do that. The steel market looks good and is looking better today than a month ago. Not that the demand for steel has increased significantly, but, the chances of an inventory driven price collapse is depleting very fast. This was the worry earlier. It continues to be difficult to believe that steel consumption globally has been rising at over eight per cent the rate at which its production is increasing.

If the production statistics are accurate, and we assume the same to be so, being given out by respectable and reliable International Iron and Steel Institute (IISI), with no sign of inventory accumulation anywhere around the world, the steel produced must have been used up. One has seen Chinas consumption level. But, if the total global consumption has to match the current level of production, steel consumption in the rest of the world will have to grow at over four per cent, if the Chinese growth is at 20 per cent. The market reports on consumption estimates, country by country, taken together, somehow do not support this contention. But, it seems it is happening. This means, more steel is being consumed in the rest of the world than one thought that to be earlier, less than three per cent. This is a good sign for steel.

The global crude steel production last year was a little above 900 million tonne. This means, at the current rate, the production this year will be in the range of about 970-975 million tonne. Does the world have enough capacity to produce this much of steel If yes for this year, will it be so for 2004 as well At eight per cent a year growth rate, the 2004 figure will be around 1050 million tonne. That is, from 2002, a clear 150 million tonne will be added to the production figure! Whether there is so much of excess capacity in the world today is a debatable matter.

But, it is a dynamic situation and capacities are getting added everywhere in bits and pieces, apart from those bulk greenfield additions in China. But, it is not enough to have blast furnaces, steel melt shops or rolling mills. There has to be sufficient coke oven capacity to feed the iron making blast furnaces, scrap and DRI for the electric furnaces and going into more basic areas, iron ore and coking coal to feed them in turn.

There will be frantic efforts to put into operation any conceivable plant, earlier mothballed or kept idle due to lack of competitive strength at then prevailing steel prices. But, these are high cost options. Many such iron making units around the world are already on track today and others, including incomplete projects, are being revamped. The input pricing scenario at present is looking increasingly threatening to the steel makers. The coking coal prices are up. Coke prices have already shot over the roof. There are reports of non-acceptance of bookings leading to a speculative price spiral in the product. There is a huge demand for merchant coke from independent pig iron producers as well as from those who shut their coke oven batteries years ago on environmental considerations and high costs and are partly or fully dependent on purchased coke. Coke has buyers outside the steel industry too.

Demand from that sector is also on the rise. Iron ore prices are also on the rise. The domestic prices of iron ore have increased significantly. There is sharply increased demand for iron ore from the sponge iron industry in India. It is linked to the shortage and high prices of steel scrap. The global scrap prices have shot up once again in the recent days. The reported booking in the Far East seem to be in the range of about $170 per tonne for HMS1 grade. Although, the world is rich with iron ore and coking coal, these will not be available in short notice everywhere.

Overall, the prices of metallics scrap, pig iron and DRI are all on steep rise. This has in its course raised the prices of semi finished products. The prices of billets and slabs have also risen.

Interestingly, the rate of growth in the prices of semis has been lower than those for the metallics. If the Metal Bulletin reports are correct, the Chinese delivered at port prices of rebars are lower than those of billets $275-285 for billets and $265-270 for rebars. The prices of wire rods have been reported to be about $270-275 per tonne. Even the European export prices of these materials do not seem to be much different. The rebars are fetching prices in the range of $270-320 per tonne (fob) while wire rods are getting exported at $310-320 per tonne. Accepting the above figures, what is appearing now is that the long product prices are getting squeezed by higher input prices and disproportionate output prices. This cannot go on for long. The prices of long will have to rise and will happen very soon, unless the prices of metallics fall. Let me now look at the flat products scenario. There has not been a major movement so far since the last month. This has been so because relatively the buyers are fewer now. The seasonal factor. But, with raw materials prices at these levels, the steel makers will be looking for the first opportunity to ask for more. Therefore, one will not be very surprised if the price increases one was talking about for the month of January or so are advanced.

The author is chief economist at the Economic Research Unit, JPC, ministry of steel. Views expressed here are personal