High steel prices tell us what to do
Martin Wolf, as he often does, wrote an interesting column in the Financial Times recently called The market sets high oil prices to tell us what to do. As $1,000/ton steel becomes an accepted fact of life it’s worth asking what the market is telling us to do about high steel prices.
Martin Wolf offers six ‘do’s and ‘do not’s’ as responses to the price of oil. Here they are and how they apply to steel.
1. Do not blame conspiracies or speculators
The steel industry version of conspiracy or speculation theory is ‘insanity’ theory. Current steel prices are regularly called “ridiculous” by some observers. But calling prices ridiculous cuts off any further, more reasoned analysis as to why prices of $1,000/ton or even twice that might not only be rational, but sustainable in the foreseeable future. Avoid calling prices ridiculous. It doesn’t help, especially if they go up again.
2. Do not blame emerging countries for their growing demand
It seems obvious that soaring steel demand in developing countries is a good thing for most industry participants, sellers and buyers. But sometimes these emerging economies are blamed for the few negative aspects to the industry’s current good fortune. China, India and the like have helped drag the industry out of its long term poor performance and we should be thankful at least for that and hope their growth continues.
3. Adjust to high prices by becoming more efficient in the use of oil
Just as with oil, the developed world has been profligate in its use of steel. We thought we could afford to be when it cost only $200/ton. But in Pittsburgh, we still use it to cover potholes in the street. In many manufacturing processes, yield losses of 25% or more are commonplace. We need to be more efficient in our use of steel because it isn’t cheap any more and it’s unlikely to be for some time. Smart manufacturers like Toyota recognize this.
4. Let the market - and not military or government coercion allocate oil to the highest bidder
It doesn’t seem likely that nations will fight over steel in the same way we can imagine struggles over oil or water. But you never know. Governments may well reverse a very healthy trend of privatizing steel assets if the temptation to garnish profits, protect high cost suppliers or control prices becomes too great. Re-nationalization of Sidor by Hugo Chavez in Venezuela might well point the way for others.
5. Get serious about investing in basic research into alternative technologies
As in energy markets, we need substantial basic research in the steel industry. We won’t replace iron as the key component of the world’s most important construction and fabrication material, but we can certainly work on how it’s turned into steel. As a large and profitable target in the social and political debate about global warming, the industry has no choice but to stay ahead of the legislators with technological innovation. This will require funding from governments into basic research, from venture capital into start-ups and from entrepreneurial risk takers into new and existing plants. But where is it? Announcements such as this recently from Cleveland Cliffs Renewafuel are still too rare.
6. Recognize that oil is playing a big macro-economic role amounting to about 5% of world gross product.
Steel is the second largest global commodity after oil. At 1.3Bn tonnes of consumption and $1,000/tonne the industry would amount to about 2% of world gross product. It is as vital to economic development and infrastructural investment as the energy contained in a barrel of oil. Its high price not only reflects its importance to world growth, but, as Martin Wolf says, it also tells us what to do about it.
