This is copy of post 03-11-2004 08:32 AM from
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Steel?s New Structural Issues: China, Raw Materials, and Rising Demand
Industries Steel
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by John Anton Global steel prices are exploding, with additional increases on the horizon. The recent gains are attributed to rising raw material costs. Input costs have steadily risen, and in some cases availability is limited. The cyclical increases will abate late in 2004, but structural changes are also occurring that will cause a permanent upward shift in the price of steel inputs.
The biggest problem currently facing the North American steel industry is the availability of coke, a converted form of coal used in traditional steel-making furnaces. The recent shortage is due to a fire at a U.S. mine that produces coal suitable for conversion to coke; once the mine is reopened, the shortage should fade. U.S. steel makers have historically imported coke to counter any short-term deficiencies. But China?long one of the world?s most important exporters of coke?now consumes its supply domestically, leaving little coke for export.
Another cyclical issue is the high price of scrap steel. Steel is the most recycled of all materials, with an entire class of newer steel companies depending on scrap as their primary input. Scrap prices are twice as high as they were at the same time in 2003. Global Insight expects scrap costs to retreat by mid-2004, but remain well above recent levels. The cyclical disruptions will pass, but a longer-term structural evolution will persist?a shift that promises higher input costs is a long-term reality. Several factors are responsible:
The dollar was extremely strong for the five years prior to 2002, and it will probably weaken further over the following decade.
The United States used to be the world?s dominant market for steel, but China now unquestionably owns that distinction.
Most importantly, global steel production has increased 25% in five years, but raw materials capacity has not kept pace.
Worse, the ability to expand capacity may be limited. China has dominated much of world?s increases in steel production, as Chinese output rose more than 7% per year from 1990 through 2000 and then exploded more than 20% annually over 2001?03. China now uses its coke domestically, and is importing scrap, ore, and other raw materials. Its surging demand means that less is available for other nations.
The first problem comes with ore. Deposits in much of North America have been mined out, such as those near Pittsburgh and Birmingham. The deposits near Lake Superior still have ore, but the extraction costs are rising. This means the highest quality ore is generally exhausted, thus forcing a lower quality to be substituted. Major deposits remain in Brazil and Australia, capable of supplying the world for years to come, and ore producers are investing to expand production in these regions, which will alleviate the existing market shortages. The question that remains is how quickly can this additional capacity be added? And, once these deposits are used up, the world will have to find new sources for ore?at some point, this will become a problem.
Scrap supplies are also tight. Over the long term, scrap growth cannot exceed the rate at which ore is converted to steel. There is room for temporary expansion through more intense scrapping of obsolete cars and factories, but it is not practical to dismantle an entire industrial base to sell as scrap metal. And while scrap expansion is limited, demand has increased dramatically. As long as scrap is cheap, electric furnace recycling has a lower cost per ton for steel than does converting ore using a blast furnace. But, as more electric mills are built, demand rises and the cost of scrap is pushed up.
Global Insight expects that the current spike in steel prices will abate, but not approach earlier troughs encountered in the late 1990s. This pattern will continue into the future. Cyclical peaks and troughs will continue to plague the industry, but each peak will be higher than before and each trough not as severe as before. The longer-term fundamental scarcity of key raw materials will place upward pressure on input costs and producers? margins. This will no doubt force another wave of industry consolidations over the next decade. Global demand for steel will continue to expand, but the availability of raw materials will grow just modestly. As a result, prices will continue to rise, and the availability of steel will be a limiting factor on global economic growth.
This article was sent to me by one of my customers. It's just FY I.
__________________ Respectfully, Mike Sherman Shermans Welding