Steel prices will rise globally irrespective of whatever impact the subprime lending problems will have on the industry. At one level, the prices dropped expectedly on seasonal factors and are sure to gain ground to whatever extent in the months to come again on account of the seasonal rise in demand.
The real concern was the situation in China. The country?s steel output continues to grow at rapid pace as more and more capacities are being added. There is no stopping here. China?s exports of finished and semi-finished steel during April-June was over 22 million tonne and if one goes by this trend, assuming no serious government efforts to curb it, the country?s steel exports will be over 80 million tonne in April-March 2007- 08! The rest of the world will find it hard to absorb this much of steel, even if it manages some more than decent demand there.
But, good news for the steel makers is that China?s own demand for steel is up once again strongly. This will reduce their need to export as much. The pressure on the rest of the world will therefore be lower. Second, the country’s mills are facing a huge hike in iron ore prices. The landed costs of iron ore in China have jumped to $125-130 per tonne.
Part of the reason for this is the increased ocean freight. The mills are paying over $65 per tonne on ocean freight to move iron ore from Brazil. Therefore, the costs of production of steel in the country have risen very sharply and in a strong domestic market they will be able to pass that on to their own buyers.
They are doing so currently. In the rest of the world the steel mills are eagerly waiting to grab opportunities arising out of Chinese cost hikes irrespective of whether their own costs are up or not.
There is also not so much excess capacity in the rest of the world to outprice the Chinese to take away a larger share of the market. Those capable of doing so and also interested in it have not been able to add even a fraction of the capacity China does in a year.
Even if there is one such in the developed world, taking that up is purely a losing proposition.
The current rise in steel prices will not be in any case a very good news for steel makers dependent on purchased iron ore and coal. High steel prices will weaken their bargaining strength in both iron ore and coal contract deals.
Initially, iron ore prices were expected to rise by about 15% for 2008. The coking coal prices will also touch anything around the $125 per tonne level.
Therefore, the steel makers are faced with rising costs and there are reasons to be concerned for many if the steel price rise will fully take care of the cost increases.
The steel mills in India with captive mines and even those with long term contracts will stand to gain. Even if the contract prices rise here, those will not match the full potential obviously due to pressures from powerful corridors.
?The author is an independent steel strategy analyst
