Steel Prices Are Always Volatile

March 26, 2004
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GRAND RAPIDS —The price of steel has risen more than 60 percent, but it’s not the worst steel price run-up the United States has seen.

Steel prices actually rose by more than 140 percent in the mid-1970s.

“Steel prices do vary a lot year over year, month to month, over a period of time. They’re like any other commodity prices; they go up and they come down,” said Jim Gillette, director of supplier analysis for CSM Worldwide.

“It’s supply and demand. Eventually you reach a price level where the supply is going to drop off. “It’s gone on before and it will go on again. I know it’s different this time in some respects and that’s what’s causing the problems. The point is if it isn’t steel, it’s oil or the dollar.”

Prices of other commodities used to make automobiles, such as steel scrap, iron and coke, have climbed, as well, due to higher demand created by an expanding global economy.

Coke prices alone increased by more than 200 percent in 2003, Gillette told a group of West Michigan suppliers at a National City Bank “lunch and learn” program at Cascade Country Club Wednesday.

He illustrated the historical up and down pattern of steel prices, based on steel scrap and iron prices from 1948 to 2003.

“People always ask me when steel prices are going to come down. Well, I’ll tell you, they’re going to come down some day, but it’s hard to pinpoint exactly when that’s going to happen. It isn’t going to be forever going up.

“We’re looking at somewhere between a 12-month and 24-month window.”

For some of the smaller stamping and metal parts suppliers, the higher price of steel could prove to be the last straw. Some may have to close their doors, he said.

“The problem we have right now is that we still have way too much capacity in a lot of those areas. The interesting thing is we still have more companies coming into the U.S. from North America doing those types of jobs.”

The steel price increase has many underlying causes, including panic buying, he said.

The last big instance of panic buying he saw was companies dishing out close to $1,500 per ounce for palladium, he said.

Steel scrap makes up 60 percent of the total cost of mill steel production, Gillette pointed out.

“There’s another reason scrap is dear to us right now, not the least of which is China. China is booming and using a bunch of that scrap.

“Another thing is that we’re making automobiles so well right now that people are hanging on to them longer.”

China continues to increase its consumption of both steel scrap and coke. The country used to export coke to the United States, he observed, but these days it’s using all its own coke for production.

“Some people think it’s going to level off in China soon. You’ve got oil, steel and copper and all these raw materials going into that market and it’s causing pricing problems, but it’s going to taper off.”

There have been a lot of recommendations that the United States restrict its export of steel scrap.

Gillette recalled that the last time the United States did that was just before World War II when it cut off steel scrap supplies to the Japanese because they invaded China.

“The whole scenario didn’t work out too well for us or them, so I wouldn’t recommend doing that.”

The other big factor is the rapid decline in the dollar, which makes foreign steel manufacturers less inclined to want to ship steel here.

Gillette said one of the big problems in the automotive industry is that those silent costs cannot be passed along to end consumers.

If GM were to start tacking those costs on to the price of automobiles, there would be a profound effect on the company’s sales, he said.

“They wouldn’t sell many cars and trucks,” he said. “The end consumer is going to control the price of what they’re going to pay for an auto. The cost (of manufacturing) does not determine the price.

“The problem is we need to find some sort of middle ground where we can share these additional factor costs — like steel and like labor — throughout that chain,” Gillette remarked.

That can be done fairly, but not right now, he said, because the relationship between automakers and suppliers has become way too adversarial.

A market solution would be for more steel mills to come back on line and build capacity, as well as to develop substitute materials for the industry, he said.

“The main thing, I think, that’s going to happen is that we’re going to have to grin and bear it. There’s really not a whole lot we can do about the situation right now. But I think the markets will settle in the next 12 months, maybe stretching to 24 at home.”            BJ

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