Steel price increases have been due to absolute shortages. Production capacity growth has fallen short of consumption demand growth not only in India but worldwide. The excess capacity that existed for years in the industry has almost disappeared. Only some of the absolutely inefficient capacities are lying idle. There is nobody ready to wait for steel to be delivered to them especially for long products such as TMT bars. Construction boom in many arts of the world including China, Middle East and India has brought in a class of buyers, such as builders and contractors, who are not ready to wait. They lose money if their construction projects are not completed in time. Steel may not be a very large component of their project cost. Therefore, they are ready to pay more, and more. The steel industry has sensed this well.
If steel has to take advantage of this situation why should the industries supplying critical raw materials to them wait? Isn?t it a fact that at current prices of steel, the steel makers, except for some unfortunately inefficient ones, still can make reasonable money even at the outrageous prices of coal and iron ore?
The point is that there is no link between costs and prices here whether one is talking about steel or their raw materials or food products or any other item that has gained prominence in the context of inflation today. Steel prices will drop on its own once the global economy finds that it difficult to sustain the ongoing phase of materials intensive development.
When steel prices will collapse, the prices of raw materials will also head the same way. It is ridiculous to believe that steel price rise has been driven by raw materials. Raw materials have only chased steel. The scrap that sells for $600 or more today at $1000 plus HRC prices, were selling at $80 or less when the HRCs were at $150 or less. Iron ore were at $18 and coking coal at about $42 or less.
The big steel makers in the world are not foolish to rush into iron ore or coal contracts accepting huge increases had they not foreseen that all would be absorbed through prices. Otherwise, they could have waited, threatened to even stop or curtail their production. Where would the iron ore or coal miners have sold their output? Last year, the coking coal prices were dropped sharply.
The oligopoly in coal was there at that time too. But, the reading of the steel market was wrong. They were worried also about the steel makers switching to alternate coal or even other technologies. They, also the steel industry, did not foresee such a massive surge in prices with consumption demand outstripping production.
The author is strategy consultant: Steel, Minerals, and Coal
