Imagine what will be the price of steel when a Chinese steel maker has to spend as much as $420 per tonne on raw materials alone to produce a tonne of crude steel. The average costs of production of a tonne of H R coils will be nearing $570 a tonne if not more. This is precisely the reason why one is talking if steel prices will shoot over the $700 a tonne mark in the peak of its seasonal cycle ? January end to February, 2008 , say. The number will rise if one assumes the spot prices of iron ore continue to maintain the existing premium once the contract prices are raised by about 30% for the coming year. Will this really happen?
Interestingly, these numbers are being discussed when the global economy is faced with uncertainties over growth prospects. The steel demand drivers, such as construction, have slowed down in the US and there is some indication of the same happening in many other parts of the world.
Three regional markets will determine the size and content of steel demand growth worldwide in the coming years ? China, India and the Middle East. The Chinese economic growth will not be as high as was in 2006 and one expects the same to be rather on the lower side in 2008. India?s growth story will perhaps also follow similar patterns. There is already clear evidence of the economy losing pace. What seems to be a matter of concern is what will happen to steel demand once the current investment boom is over as the strong conditions in the steel market is being supported so far by the surge in investment mainly in the recent years. Given the fact that a large number of the investment plans involving industrial capacity expansion have remained non-starters due to a variety of reasons and progress in infrastructure remains particularly slow, a short term depression in steel demand may be expected in India too. The Middle East, however, will continue to remain good for steel with oil revenues continuing to pour in.
Therefore, the global economy may not support a benchmark HRC price of $700 plus. The point is, if demand falters globally, even for a while, assuming even the best of practices in supply management, as has been seen in the past few years, the steel makers worldwide may see their margins dropping, unable to raise the prices sufficiently to absorb all the costs.
High cost Chinese steel makers in the world?s largest steel market have so far done good to the industry in other places, where raw materials costs are lower. The country will produce perhaps 500 million tonnes of crude steel this year. Their demand for iron ore has already raised the spot prices of even fines from India to about $110 a tonne on fob basis. One wonders why the Chinese are chasing a rather unsustainable business of making steel in their country beyond a point. Except for a few with solid raw materials linkages, most of the Chinese steel makers do not make much money, with a large number of them losing even in the best of the time.
In any case, even if the world finds it tough to absorb higher steel prices, the steel makers are left with fewer options.
?The author is an independent steel strategy analyst