US long products import licenses declined from a peak of 462,000 short tons in April to 238,000 short tons in May. About 65% of this decline is due to Turkey, which did not apply for any rebar or wire rod import licenses in May (nor did it in March). In comparison, Turkey’s rebar licenses were 105,000 short tons in April while wire rod licenses were about 39,000 short tons.
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A reader called NanoSteel posted a comment recently asking if we knew the total value of M&A activity in the global steel industry for 2007. One source is an annual publication by PWC which compiles transactions in the global metals industry.
According to the PWC there were 249 deals in the global steel industry in 2007 worth $61 billion. Comparable numbers for 2006 were 236 deals worth $79 billion. So more deals, but on average smaller deals. This is consistent with what we observed last year – consolidators continue to be active but many of the most obvious first stage deals have been done and the next stage of deals will be more creative and reach further into the undergrowth of the global industry.
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It used to be the case that minimills (scrap buyers) and integrated mills (iron ore buyers) had very different cost structures. Integrated steel producers’ costs were relatively fixed because iron ore and coking coal were sold on an annual contract basis and did not change much year to year. Scrap prices on the other hand, moved up and down with steel demand end helped minimills maintain their margins across the cycle. That was then and this is now.
The raw materials used to make steel are in short supply globally, causing much greater volatility in all raw material prices and different purchasing behavior by steel producers. From the few time series which are available to compare the two, scrap and pig iron prices track each other. See the chart below.
So it’s not really fair to fault EAF producers for reacting to iron ore price hikes or integrated producers for reacting to scrap price shifts. Iron is iron and, if priced efficiently, the two commodities will price an iron unit about the same. If you don’t believe iron is iron, check out the recent announcement that Nucor, the largest minimill in the country, plans to build a blast furnace to make the stuff.
And it’s the surcharge, another undoubted frustration for steel buyers (and producers), that has driven steel prices most. There are a number of different flavors of surcharge depending on the product you’re buying and who you’re buying from. But in all cases the surcharge mechanism is relatively transparent, at least enough to show how the supply/demand tensions of the raw material compare with the supply/demand tensions of the finished product.
To make that comparison, just take the calculated surcharge of hot roll sheet or plate from any of the US producers and subtract it from the Purchasing Magazine monthly spot price for those same commodities. You will see that after an initial run up in the base price (i.e. the price excluding the surcharge) in 2003/4, most of the price changes since then have come from the surcharge mechanism alone. It’s only in recent months that the supply/demand dynamics of the finished steel product markets have also started to put upward pressure on prices.
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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.
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Below is a presentation I made to the Steel Manufacturers Association’s annual members meeting in Washington, DC on May 20, 2008. The title was “Black Swans in the Steel Industry: What do They Mean?” (Of course the title is taken from the best selling book by Nassim Nicholas Taleb.) My presentation identifies what I believe are a few very significant recent developments in the industry and argues that these black swan events are manifestations of the seismic and systemic changes the industry is undergoing. Of course once you’ve seen a black swan, your perception of swans is forever changed.
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