Current Trends in American Market Steel Prices - Report Example

Current Trends in American Market Steel Prices Outline What influences the Steel Prices on the American Market? Steel has become one of the most important raw materials in the world. It has become essential in all modern industries. Recent developments in the world market have jacked up steel prices. The increasing demands for steel in building industries have both prompted liberalization and protectionism in some countries. In 2002, the United States raised tariffs on imported steel to help its local industry from a price war and to create the competencies it would need to become more viable in the world market. In the extreme, certain business areas can be largely effected by shortages and price increases, strongly influencing their overall profitability and ultimately, in certain cases, threatening their survival. In the following I would like to investigate some of the causes, effects and remedies for the price of steel in the United States’ market and will attempt to make some predictions as to its future development. I) The US Steel Market a) Developments b) Prices II) Supply and Demand a) Supply b) Demand III) Factors interrupting the Economic Equalization of Pricing Acknowledgements Abstract Steel is considered so important a commodity that it is part of world product indices. Steel is essential in all industries either as a raw product or needed in creating factors of production. US prices of steel follow closely global prices. Recent development has indicated that demand will have a greater effect on prices rather than supply. Aside from the interaction of supply and demand, US markets are also very reactive to global market developments and these factors have proven to be indicative as well of US steel market prices. Introduction In the extreme, certain business areas can be largely effected by shortages and price increases, strongly influencing their overall profitability and ultimately, in certain cases, threatening their survival. In the following I would like to investigate some of the causes, effects and remedies for the price of steel in the United States’ market and will attempt to make some predictions as to its future development. The question of steel prices has moved into the centre of attention of the economic world since they started skyrocketing over the last 2 to 3 years. The increasing demands for steel in building industries have both prompted liberalization and protectionism in some countries. In 2002, the United States raised tariffs on imported steel to help its local industry from a price war and to create the competencies it would need to become more viable in the world market. As steel is at the core of a large number of products, increases in the base product have a tremendous effect on the prices of subsequent product and thus on several price indices. In the extreme, certain business areas can be largely effected by shortages and price increases, strongly influencing their overall profitability and ultimately, in certain cases, threatening their survival. Steel price has been identified as one of the primary reasons for the general increase in prices based on the world wholesale price index. Analysis of the prevailing trends in these data can be used to gain insight to local American steel industry pricing. The apparent trends being shown in American steel markets have been seen as being correlated closely to international steel market trends. Earlier in the year flat steel product pricing was perceived to be diametrically proportional to movement in the international market while long steel product prices have closely followed domestic prices more. This differential performance is attributing to time differences in consumption of the respective product. The development of more extensive international trade and business to business e-commerce in the steel industry has dissipated this phenomenon. Vacillation of world market prices for steel now has a more immediate effect on local American markets. The greater accede of local markets to global ones have allowed for the proximity in indicative performance of price. Regardless of whether in the global or local market, the price of steel as reflected by steel price indices is dictated by the interaction of supply and demand. In local markets, factors such as currency rates, tariffs and other regulations will have greater effect. Figure 1 reflects how price equilibrium is defined for a product or commodity. To facilitate international trade, price indices are set up to benchmark process and to also assess the industry’s productivity levels. Table 1 shows an excerpt of a price index. Commodities’ weight and percent contribution measure its impact on markets and gives an idea to the degree of influence its supply and demand on other commodities. Other factors that are utilized for reference to a commodity are its historical performance and growth. As shown in Table 1, steel, assessed together with iron, has a low weight in the index. This reflects that compared to other commodities its consumption is not as prevalent. The reason for this is that steel is an industrial commodity and not a consumer like the bulk of manufactured products. For the same reason, it has a less immediate effect on prices as well. Though it ranks low in weight and contribution in price, its historical index and growth is high. This reflects that as an industry it has become one of the developing and is gaining in importance. The industrial market movements have been attributed mainly to developments in the market in Asia, particularly China, in recent years. Analysts say that one of the drivers of the price of steel was the swift increase in demand that could not be met by current industrial players and the subsequent reduction in Chinese imports is the primary reason well why prices have dropped (Latin-Kasper, 2006). One of the reasons that have been cited for the lack of supply on the other hand is the lack of development of the steel industry as whole. This has lessened competitiveness of some established suppliers like those from the United States and in turn has prompted protectionist regulation of the industry (Cooney, 2006). The US Steel Market Beginning October of 2003, the price of hot rolled steel was pegged at $US340/350 per tonne in Asia North America as well as the European Union. However by the end of the third quarter of 2004, American prices broke away and rose to close $US800 per tonne before eventually veering to $US550 by the end of the second quarter of the year. This peak then eventual veering off behaviour was reflected in Europe when domestic hot rolled coil steel prices soared to $US700 by the conclusion of 2004 but also went back down to $US530 per tonne six moths afterwards in 2005. One of the major developments that have become a common effort in the United States steel industry is to consolidate and streamline companies and their operations. Though there have been significant integration, the industry is still seen as a disjointed one (Arnold, 2002). Though this can also create variation in the industry, it can be a cause of decrease competitiveness in the global market. Though steel and products produced by the United States and in supply in the country are already competitive, it is vulnerable in the event of a price war because of the higher cost of labour in the United States versus other producers (Visclosky, 1999). Federal regulation has aimed to support the steel industry as it became apparent that the industry was put at a disadvantage against global competitors. Efforts have met moderate success but have not been able to budge prevailing conservativeness of demands (Iritani, 2006). By the end of 2003, MEPS domestic average hot rolled steel prices in America was at $US340/350. Similar price levels were apparent in Asia, Canada and Europe. Aside from similar pricing, these markets have also all reflected volatile price movements of the commodity in the past couple of years. Compared to Asian markets, though they have been very similar, American markets have had greater variance and unpredictability: Asian prices only rose to $US600 per tonne in May of this year while American prices almost the $US800 per tonnes, showing a variance of $US200 per tonnes. US Industry Developments and Position Steel industries enjoyed significant growth in at the beginning of the 20th century together with industrialization. Development of cost-effective production and distribution methods has also contributed to the growth of the industry (Fletcher, 2005). The industry grew from trading 28 million tons to 780 million tons during the 20th century. Developments Figure 2 shows the ratio of the United States’ steel imports to supply. According to Cyert and Fruehan (1996) the reflected decline in the 1980’s indicated by the increased steel imports was due to the inability of the United States’ steel industries to meet demands in terms of quality. This prompted the industry to increase standards and to modernize itself which resulted to reduction of imports to less than 20%. But the resurgence of US steel industries in the country was short-lived when imports again rose in the middle of the 1990’s due to the inability to supply local demands. Though imports increased, local industries still enjoyed growth but what was not able to cash in on the national demand (“Global steel industry trends”, 2006). However, by 2005 the progression of steel in United States eased off resulting to decreased outputs and revenues. The global industry however fed off China’s increasing demands of the commodity as well as became an exporter of the commodity by the same year. This was prompted integrated producers to again reevaluate and its methods to increase efficiency and has made itself as one of the lowest cost suppliers of steel. Despite these efforts however in increasing capacity, more efforts are still needed to be done to increase competitiveness to compete internationally. The industry still is experiencing downsizing. The picture remains promising for the industry however with continuous investments coming in, increased productivity and ration of capital and investments. Congressman Pete Visclosky voices the popular sentiment to further make efforts in protecting local steel producers from imports not just as a protectionist strategy but as a means to ensure long term health of the industry (Visclosky, 2003). In his address to the US Congress in support of tariffs on imported steel and products, he addresses this issue referring to unresponsiveness of demand trends and historical loss in the industry: “Domestic steel consumers have not faced an appreciable restriction of imports, and domestic producers have consistently produced high-quality steel at competitive prices. At the same time, our American steel producers are still reeling from past import surges, and deserve the protections” (para. 10). Congressman Visclosky has reflected the general sentiment in the steel industry that the opportunities globalization should afford them has not been realized. A major factor that has been sighted is the lack of oversight in anticipating how illegal steel imports can affect supply levels. Prices The decrease in domestic prices following global trends is mainly attributed to the slowing down of Chinese consumption. American markets that mimic closely global prices went down as well. Imports reduced by 30% by the start of 2005. Reduction of demand in global market is not directly related to the decrease of growth in industrial demand. China’s resurgent steel industry is now able to meet local market requirements and has given allowed China to enter the global market. Analysts believe that Chinese productive capacity will affect closely American markets who were previously optimistic about the chance of supplying demands in China. If production in the United States continues as it is, prices are seen to follow a general and continued decline. However, production has not levelled off as American markets anticipate growth in Europe and from India. By July of this year, steel prices have not gone up. Current trends have shown now shown a significant change from historical performance of steel prices domestically or intentionally. None of the price increase scheduled by the industry was implemented mainly due to market forces. There enough demand to enforce the price and consumption levels discouraged suppliers to increase price fearing further reduction of consumption. Spot price levels have posted decreases in almost all of steel products or commodities. Steel price curve for warm-broadband as reference went down for the first since 2003 and this development is seen to continue in the future. The increased capacity of the United States steel industry was not been utilized enough: capacity utilization has been limited to 75% (“US market developments following the section 201 measures”, 2006). Figure 3 shows the price of US produced hot rolled coil and other steel product prices. Price decreases have been attribute mainly on imports and overcapacity that was rooted from over anticipation of international demands. The other significant development has been the increase in the price of semi-finished steel imports that is being utilized by US steel companies themselves to manufacture other steel products According to Christopher Plummer, Managing Director of Metal Strategies Inc. says that it essential to see the trends from other markets because US markets tend to move closely with the average of these prices (Robertson, 2006). According to industrial analysts, prices will remain stable but will unlikely to go up as desired by steel suppliers. Though buyers of steel are benefiting form the development, demand is still not increasing sufficiently due to a general slow down of the US economy. In particular, prices are seen to weaken in last quarter of 2006 but are predicted to become sharper in 2007. Latin-Kasper (2006) says that, “In the face of growth in consumer spending, driver shortage remains the larger problem for the industry.” This reflects that though there is a slow demand today, the steel industry technically is still performing below demand and that price may still be prohibitive to jumpstart industries out of the slow down. Furthermore, Plummer claims that people should expect the gap in as shown in Figure 5 to equalize before the end of the year. Supply and Demand Steel prices in the global market is continually becoming capricious and indicators have shown that it will be driven more by supply and demand rather that conscious control or regulation of markets. Raw materials for steel production have been increasing due to extra-industry demands of the raw materials. In some cases, supply has even been prohibitive to all access. Though restrictive access to raw materials have eased since 2004, current industries have now have to deal with the need to restructure to meet demands of not global markets but international regulation prompted by political or financial regulation. One of the important factors that have to be dealt with by American steel industry companies is the availability of coke, a derivative of coal utilized in conventional steel production operations. The shortage that the United States is currently dealing with is because of reduced local production. Whereas before, American companies would source coke from other producers like China easily, they now also have to compete with China’s respective steel industries for the material. It is natural that china will have preference for its local industries thus American companies have to also compete for raw materials with their international industry competitors. Supply There are various types of steel sources that are being utilized in the United States. The need for Aside from actual production of steel and steel products, other factors are seen to affect significantly supply of steel in the United States. Though the United States is already producing enough for current demands, buying is not directly related. Companies are still opting to import due to existing contracts are specialized needs for manufacturing (Visclosky, 1999). Some of the other factors being identified as essential are the following (“Global steel industry trends”, 2006): currency strength, influx of steel from China, world production levels and capacities of individual companies. Table 2 shows the list of major producers in the United States. The table shows that though there are significant supply in the United States, some major producers are not supplying the US. This may in turn mean less choice for the market and less variation for products. An important point is that among the five major producers in the world, only Mittal Steel and JFE Steel are the only ones currently supplying the US Market. One of the reasons why suppliers are limited is the protectionist regulation that has been established in 2002 to support local industries. While the efforts has been lauded as pro-American, some critics point out that these does not promote efficiency or development and may deter the industry in the long run (Cooney, 2006). Berger (2006( point out that more than any other external factor, current US markets are being affected by increasing demands by India and China. Though the demand in China has declined, it still significant enough to make it a significant competition for steel supply. Considering that the current market is already stable, direct proportionality should be expected of demand and supply. However, John Anton, director of Global Insight Inc. points out that "Demand is rising, but not as fast as supply. If those trends continue, youll see pricing coming down” (Robertson, 2006, para. 12). This reflects that the market may be stable but equilibrium in the market has not been achieved. Thus, the current level of supply in the current market, even if there is existing surplus, current capacities are not enough to meet industry aggregate demands. Demand Downstream demand has become less primarily because of high prices. The high prices that were from the 1990’s has yet to come down into levels were demand can go up to absorb current overcapacity levels. Production did not respond timely to the demand contractions resulting to a stabilization of prices but little difference in demand. Demand from China and India has driven up the prices though there is ample supply but US markets are not absolutely benefiting from it primarily due to limited access to markets of China and India. This has driven the price of galvanized steel from $496 a ton in 2001 to $729 a ton last by June 2006. Amidst all these recent developments and general optimism regarding the industry, steelmakers in the United States citing that current increased demand driven by China’s and India’ industries could be just a superfluity causing prices to dive which can reduce revenues adversely. Daniel Ikenson from the Cato Institute said that cost is not just the factor to consider (Iritani, 2006). Another important factor that has to be considered is the nature of the demand for steel products. This points out that need for an assessment of the demand of steel considering operational and production need of industries in the United States. Steel supplies must fulfill not just the amounts of steel needed by industries; it has to be able to meet also the manner by which the demand is made. Steel demand remained high so far in 2006, fulfilling expectation set the previous year. Demand was chiefly sustained by sport-utility vehicles and automotive transplants industries. Demands posted high trends seen from the 1990’s and the continuing popularity of sport-utility vehicles will likely continue and drive demand high. Overall, the expected 12% growth of the automotive industry by 2007 is driving current markets (Iritani, 2006). Research analyst David S. MacGregor from the Longbow Institute says that, "We are seeing a reversal of the high demand, low supply situation that occurred in the first half of 2006,". If so this maybe essential in matching demand to current capacities to fully establish supply and demand in the steel market in the United States. Analysts believe that demand rates right now are stable but have yet to reach their potential. Factors Affecting Economic Equalization of Pricing The implementation of protective tariff measures for the American steel industry detailed in section 201 caused the appreciation of steel prices and consequently domestic steel prices in 2002. With China’s new position as the second steel exporter in the global market, it is expected that anti-dumping occurrence could be more apparent in the future. The European Union’s growing steel demands doubled and even exceeded average consumption by 6%. American suppliers who dominate the European have been able to profit from this development and resulted to the sustaining high level of prices. There has been much concern regarding the gap in supplies and actual demand and consumption. These fears have eased as prices have continued to be more stable and recovery of revenue from earlier in the year has been achieved. The high level of stock in the steel trade has not yet reached a level that would prices down but experts claim that if demand doesn’t come in sufficiently enough, and soon, the steel industry may experience a steady decline for 2007. Price of steel is to continue its stable trend but is expected to remain high. This would mean that consumers will only benefit from the decreased fluctuations of the prices that has developed volatility to the industry that utlize steel. Little cost reduction is seen in thefuture or should be exoected according to experts (Berger, 2006). There is still espectation that prices will fall due to existing supply levels ("Market Spotlight: Steel Prices to Fall”, 2006). However, the industry has tended not to follow this model and instead has remained relatively unchanged similar to demand levels. United States Steel Corporation Chairman and CEO John Surma says that in definign the price of steel in United States markets, demand will be more influential tahn supply("Demand drives US Steel“, 2006). He believens that the current supply levels will not price levels respond as much as demand will. Later in October, Surma claims that United States Steel Corporation, the seventh largest steel manufaturer to date does not see demand increase to the levels it needs, it will opt to reduce production already ("United States Steel Corporation“, 2006). This reflects the improtance of demnad that Surma earlier pointed out in July. Another factor that is seen to factor importantly to steel market prices is the depreciation of the dollar. This decline of the dollar can drive steel prices to go higher but maybe limited by level of demand. Berger and Iritani both believe that there are elements in the current American market that will drive prices to become higher but that factor such as tariffs and global demand are limiting factors that will not allow a great variation of 2007 prices from those of 2006 (2006). Ore prices will mean lower costs for companies, but this will not be a motivation for decreasing prices since the industry believes that there is still a lot of revenue recovery to be done from the last five years (Robertson, 2006). Anton expects that prices may decline by the last quarter of 2006. (Robertson, 2006). However, his threory is premised on the supposition that declining product markets of steel can be sufficiently supplied increase demand as a whole. Bank of America analyst Kuni M. Chen, believes that a mojor goal that should be taken up is preventing these incidents. In doing so, prices will become less vulnerable to price bulnerabilites and create sounder comptencies to compte intrnationall ("Briefs: U.S. Steel may curb output if demand falters”, 2006). 2006 prices are expected to be between $500 - $550 and will cary over to 2007 with only slight decreases given current situations (Berger, 2007). One of the reasons for the continued relatively homogenous pricing is that demand is not expected to change signifcantly nor would the expected changes in supply affect current market levels. If supply reduction is followed thrrough as claimed by Surma, it is expected that it would beging to affect at the earliest third qurter prices of 2007. Regradless of all other factors, goverment and industry are making an effort to maintain a stable but high level of pricing to maintain profitability and viability of the indutry. These efforts may circumvent or dampen natural economic forces affectinglower prices. Though in the long run, this may be damaging to the industry as well w\in terms of global competitiveness. Conclusion A key competency that the United State has is its economic background and the strength of its steel industry. The entry of China into the steel market despite global decline can mean two things: growth still is seen as a possibility but competition is bound to get even stiffer of steel industries in the United States. It has been shown that the steel prices in the United States are closely related to prevailing world trends because it has a tendency to gravitate to global averages (Robertson, 2006). Therefore, to be able to understand these markets, it is essential to closely monitor world rates and trends. American markets are enjoying the support of government and industry coalitions but this can not ensure long term health of the industry. To be able to create the needed competencies in the global market where maximum profits can be achieved, American steel markets must be able to increase its competencies beyond economies of scale and improvement distribution access and channels of steel products. To be able to creative competitive strategies to achieve demand levels to increase price to desired levels, the United States has to develop demand and consider global factors closely: Some key factors that are to be considered are: 1) Raw Material Prices a. Shortage of raw materials: b. New production capacities predicted by end of 2005 that have become apparent in the first three quarters of 2006. c. High concentration of suppliers and operational and functional demand of steel products 2) Entry of China into the Steel Market a. Economic growth approx. 8% p.a. until 2007 b. Measures of the Chinese government limit overcapacities c. Risk of bursting bubble and sudden decline in demand (hard landing) 3) Costs of Production a. The large need for raw materials, especially coal, for the energy supply and climbing exports lead to very tight transport capacities and high costs, although below the level of Spring 2004 b. Ore costs are expected to decline at the end of 2006 and may be an important factor in computing profit and revenue ratios. 4) Miscellaneous a. Steel customers in Asia, Europe and the US are refilling their stocks and thus keep demand and prices high b. Liberalization of prospective trade markets in Asia and Latin America c. Political issues and security conditions in developing markets in the Middle East and North Asia References Arnold, James (2002). Americas steel firms no longer lead the world. BBC Online 6 March 2002. Retrieved on November 8, 2006 from http://news.bbc.co.uk/1/hi/business/1857914.stm Berger, Roland (2006). Steel Prices to Remain High. Retrieved on November 8, 2006 from http://www.rolandberger.com/press/en/html/releases/516-press_archive2006_sc_content/steel_prices_to_remain_high.html. Briefs: U.S. Steel may curb output if demand falters, Surma says (2006). Pittsburgh Business Times 4 October 2006. http://www.pittsburghlive.com/x/pittsburghtrib/business/briefs/s_473374.html China and commodity markets (n.d). Retrieved on November 8, 2006 from http://www.economist.com/finance/displayStory.cfm?story_id=4488944 Cooney, Stephen (2006). Steel: Price and Policy Issues. Congressional Research Service Report for Congress hearing on Steel Industry . US Congressional Research Service Cyert, R. M. and Fruehan, R. J. (1996). Meeting the Challenge: US Industry Faces the 21st Century – The Basic Steel Industry. Pittsburgh, PA: U.S. Department of Commerce - Office of Technology Policy Demand drives US Steel (2006). Pittsburgh Business Times 25 July 2006. Retrieved on November 8, 2006 from http://www.bizjournals.com/pittsburgh/stories/2006/07/24/daily8.html?jst=s_cn_hl Fitzgerald, Sara J. (2004). Export Controls on Scrap Steel Would Harm the U.S. Economy. Retrieved on November 8, 2006 from http://www.heritage.org/Research/TradeandForeignAid/em928.cfm Fletcher, Anthony (2005). Concentration within the steel industry could result in greater price stability and lower costs for packagers, though this needs to be put in context. Retrieved on November 8, 2006 from http://www.packwire.com/news/ng.asp?id=59692-industry-consolidation-promises Global Steel Industry Analysed (n.d.). Retrieved on November 8, 2006 from http://www.engineeringtalk.com/news/mep/mep187.html Global steel industry trends (2006). Wikipedia Free Encyclopedia. Retrieved on November 8, 2006 from http://en.wikipedia.org/wiki/Global steel industry trends Iritani, Evelyn (2006). Industries at odds over steel tariffs. Anti-dumping duties aid U.S. makers and burden buyers. Los Angeles Times. Retrieved on November 8, 2006 from http://www.latimes.com/business/la-fi-steel30oct30,0,1922459,full.story?coll=la-home-business Latin-Kasper, Stephen (2006). 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Testimony on the Current American Steel Crisis. Address for the House Committee on Ways and Means - Subcommittee on Trade. What Chinese steel exports mean for the world (n.d.). Retrieved on November 8, 2006 from http://www.moneyweek.com/article/846/investing/commodities/chinese-steel.html Read More