Prediction: Steel Prices Staying High
DETROIT — People in manufacturing who expect spiking steel prices to start softening any time soon are due for a disappointment — and maybe a traumatic one.
That, at any rate, is the view of Michelle Martinez of Detroit, editor of Modern Metals Magazine, a Chicago-based publication that has been following the issue closely.
In a recent article, Martinez characterized the steel price run-up as a “perfect storm” stemming from the confluence of numerous global events.
The Business Journal contacted her at the suggestion of a local steel supplier who professed to be greatly upset by an article in the Business Journal’s March 29 edition.
That article, based on an interview with a supply analysis staffer at CMS Worldwide, indicated that the steel price spike was probably just a transitory phase in the usual wide fluctuations of steel prices.
Martinez said, however, that she and her associates disagree.
They believe that steel prices, now about 200 percent of what they were six months ago, are going to stay that way the rest of the year and well into 2005.
She characterized the price spike as a global event that began about six weeks ago when China suddenly began pulling steel-making raw materials off the world market.
China did this by sharply increasing its own purchase of ferrous scrap metal and almost simultaneously announcing that it would reduce its coke and coal exports to the world.
“That set up kind of a domino effect,” Martinez said.
She explained that China supplies about 80 percent of the world’s market with coke and coal, and that it cut back its supply about 20 percent.
“So when they have a cutback like that, the whole world is going to feel it.”
She said Eastern European countries reacted quickly by deciding to reduce their own exports of ferrous scrap. “So they put up limitations,” Martinez said, “and something like nine million tons is gone from the market.
“And when they did that,” she added, “South America decided, ‘Hey, that sounds like a good idea, too,’ so they did the same.”
From the U.S. perspective, she said, the weak dollar doesn’t help. Because other markets are more lucrative, the weak dollar tends to keep imports and raw materials out of the country.
“So what you have is a confluence of events,” she said. “And it’s got legs.”
Part of the confluence of events leading to scarcity and thus rising prices in steel, she explained, is that steel production capacity in the United States is currently declining — some of it permanently, some of it temporarily.
In one of several examples, she said, U.S. Steel recently closed its mill in Ecorse, Mich. It will be out of production for two months, thus keeping perhaps 2,000 tons of steel out of the market.
In an eerie parallel to the domestic oil industry, where the number of refineries has dropped precipitously over several decades, some steel mills are being closed for good.
“They could not support their price capital,” Martinez said. “They couldn’t support themselves.”
She hinted there would be no great rush to reopen mills like the one in Ecorse because steel negotiations with the automakers are coming up soon.
She explained that steel producers have no inclination to go into those negotiations with prevailing prices that are too low to generate a return on investment.
“When you have all these things and there’s no sign they’re going to dissipate in the near future,” Martinez said, “then what we’ve seen and what we’re hearing tells us that steel prices are actually remaining quite strong.”
She said steel users can expect a modest hiccup in prices. “We’ve seen some softening of Chinese demand. And the world’s metals markets are sort of governed by what happens in Asia now.”
The cause of the hiccup, she said with a chuckle, is that most of China’s ports right now are jammed with freighters and ore carriers waiting to off-load cargo.
“They have a 25-day backlog at their ports,” she said, because Chinese logistics and transportation currently can’t handle so much material efficiently.
“That is going to affect prices slightly,” she said, “but we’re still talking about prices that are 200 percent over what they were six months ago.”
In a way, the price spike makes sense, she said, because so many mills in this country had been operating at or near a loss. “And you had all these ridiculous swings in price all over the map. Service centers were at risk.”
But with prices elevated for at least the next year, she conceded, stampers, forgers and other Tier 2 suppliers now are at risk.
In her recent article, Martinez wrote that the price spike may be a symptom of something bigger.
In early March, she indicated that the magazine sampled the combined views of its Editorial Advisory Board — a collection of mill, service center and manufacturing executives — on what the new rules may be in the global economy.
Martinez wrote that the executives agreed that though the current cycle will end, casualties are almost a certainty. And if there are opportunities left, the emphasis for many in the industry is short-term survival.
The article also quoted Charles H. Blum, president of Washington D.C.-based International Advisory Services Group Ltd., who said, “I call this a single-elimination market.
“One bad cycle and you’re out.”