I'm sure blaming shortages and inflation on China will be the tack with the "dog ate the homework" crowd. I'll bet Greenspan and Berneke engage in this during their on going moral hazard road shows this week. You can also see it in this purchasing.com article, very typical inflationary psychology I'd say. Second Stundza article a bit more reasoned.:
Fear & Loathing in America: Greed drives steel marketplace into chaos
Tom Stundza, Executive Editor -- 2/27/2004
Greed appears to have blanketed the sheet steel marketplace. How else can a supplier explain charging $800/ton to guarantee delivery of cold-rolled coils in April? That’s two-and-a-half times what the same product cost in December, and $150 more than the same steelmaker had told the media it was planning to charge for April bookings. Another mill says it will make April deliveries only on condition of “the market price in effect at the time of shipment.”
Prices have risen across most steel product lines. But, steel buyers are having the hardest time getting a handle on market prices for sheet and plate products: Sheet pricetags in February have jumped 30% in a year, and mill suppliers continue to adjust future prices upward so that market prices in April could be 60% higher than a year earlier. And, since strong global demand for steel has caused surges in costs of the raw materials used in making the metal, many U.S, steelmakers have placed surcharges on their mill products.
The problem for buyers is that what mills say they are going to charge, and what they actually put on invoices, are becoming two different things. One steel company changed its mind about February and March prices thrice in recent weeks. “The steel market is a three-ring circus just now,” agrees the purchasing manager for a New Jersey-based steel drum manufacturer. “Steel mills are canceling cold-rolled sheet orders they accepted as far back as nine months ago for second quarter delivery unless we accept their new and exorbitant sales prices.”
Steel prices spike due to raw material shortfalls
Steel Pricing
Tom Stundza, Executive Editor
Purchasing
February 27, 2004
Steel prices, especially flat-rolled prices, have exploded in the U.S., and 78% of steel buyers polled in February see further price hikes in coming months. For the first time in three decades, steel is selling priced at time of delivery. Hot-rolled sheet steel, which cost $330-350/ton in January, could cost $500 or more when orders placed in the first quarter finally get delivered in the second quarter.
“Prices on all types of steel products have risen considerably in recent weeks, and it looks like they will continue to increase for the foreseeable future,” says a machinery company’s purchasing manager. Market prices are rising because of cost increases for steel scrap, iron ore, pig iron and coking coal; coke shortages are restraining production and low imports of foreign steel because of the weak dollar. So, while demand is awakening from a three-year slumber, steel hasn’t been available in sufficient quantities so far this year, and will be much, much costlier when it comes to market in March and April.
It appears that 2004 will be a year of recovery for steel consuming sectors; in fact, steel-demand forecasts now range from 4.2% to 8.2% in year-over-year increases by the fourth quarter of 2004. “We are seeing strong orders that are well exceeding our business plan,” says a materials manager for a heavy equipment manufacturer. However, there are some worries about buying strength. “Just as the manufacturing industry is slowly starting to recover, skyrocketing metals prices may end up smacking us right back down,” says the purchasing officer of a fabricator of truck trailer parts.
As for prices, they are rising well ahead of demand growth, and more increases are expected through April and May. Raw materials price hikes are not abating, so surcharges are sticking--even though $25-30/ton fees in January and February are moving to $90/ton or more in March. “Steel surcharges and broken long-term supply and pricing contracts are killing this year’s cost forecasts,” says the commodities manager for a storage products company.
“The mills regained pricing power as shutdowns and consolidation reduced the number of competitors,” says analyst John Anton at Global Insight’s Washington office. “This consolidation is allowing mills to pass along the higher costs, rather than eat the costs to try to maintain market share.”
Some analysts initially expected that steel prices would see a spike-and-crash profile, just as in 1998, 2000, and 2002. However, this spike is different because the shortage of raw materials is preventing mills from ramping up production. Moreover, Chinese demand and a weaker dollar are retarding imports from flowing in and undercutting prices. The analysts, therefore, suggest that supply shortages and elevated pricing is likely to persist well into the summer. “Prices may not begin retreating until late in the third quarter of 2004, or even until the end of the year,” says Anton.
Some big customers are challenging higher spot-market prices and, especially, the surcharges. General Motors, for example, the largest steel consumer in the U.S. and Canada, is rejecting invoices from steel suppliers that include such “non-negotiated extra charges” as mill surcharges and freight premiums. “If any non-negotiated extra charges (example: premium freight, mill surcharges) are included on your invoice, your invoice will be rejected and will not be paid,” writes Beverley Snyder, purchasing manager for metals at General Motors of Canada Ltd. Similar memos from U.S. purchasing managers are described by GM spokesmen as “administrative reminders to suppliers that invoices must conform to original contracts,” which last year settled prices for 2004. Ford and Chrysler purchasing also are reported to be balking at the higher prices and surcharges.
Many smaller companies that don’t have the buying clout of automakers are paying higher prices and surcharges. Many service centers, processors and fabricators tried to buy in advance to avoid anticipated price gains in the second quarter and later. However, many of these orders were turned back by the mills, who have been putting even long-standing customers on allocation, which means buyers get only a percentage of the steel they want.
My comment: These outfits are the first casualties of the Train Wreck collapse, leaves giant holes in your industrial base. For example, say a firm needs a handle for steel garbage cans, they go to their traditional supplier, and that supplier is either out of business, or doesn't have product.
Let’s blame China
Analysts are blaming Chinese demand, and opportunistic sales by occidental traders, for much of the cost inflation impacting the stream of raw materials. It is true the stampede to China to manufacture goods and build its infrastructure has created a huge demand for steel, which in turn has boosted demand--and tightened supply worldwide--for the iron ore, pig iron, scrap and coking coal used to make the steel. But nobody knows for sure exactly how much steel is being consumed or produced in China, and that is exacerbating the uncertainty about the true state of the world steel market. Steelmakers and steel buyers use production and consumption data to set prices and adapt to shifts in demand. However, the Chinese industry and marketplace is in such a dynamic state that it is difficult to take an accurate current snapshot.
We do know that China’s demand for steel has exploded as it builds infrastructure for the Beijing Summer Olympics in 2008 and as it works to expand internal durable goods manufacturing. Chinese steel consumption rose 30% last year to reach 250 million metric tons in 2003 or one-third of the world output of rolled steel. In the meantime, the country produced 210 million metric tons of steel in 2003, up 15% from 2002. To feed their mills, Chinese producers have been scouring the world for scrap steel, causing scrap prices in the U.S., the world’s largest supplier, to rise by as much as 80% over the past year. Also because of the rising demand from China, prices for iron ore, another key ingredient in steelmaking, are up 19% on world markets. And China’s appetite for scrap and iron ore isn’t about to dissipate quickly.
Chinese steel output is expected to increase another 10% this year, according to analyst Henry Kwon at J.P. Morgan Securities in Shanghai. It has also been reported that Japanese steelmakers exporting to China do not expect to see any slowdown in steel consumption by their giant neighbor until after the Beijing Olympics. Though China’s steel production and consumption increased rapidly over the past two years, experts quoted by the People’s Daily newspaper this month say that China’s steel consumption will not reach its peak until 2010.
“To judge whether or not a country reached the peak of steel consumption, one should consider the certain country’s industrialization level,” says Li Shijun, deputy secretary-general of the China Iron and Steel Association. He notes that China only entered a new round of rapid economic development in 2002, so the nation is still in the development stage of industrialization. By 2005, the country will need 250 million tons of steel and the figure is expected to reach 310 million by 2010, says Li.
U.S. market scrap has skyrocketed in price because of strong demand in China--and also from the rest of Asia, North America and Europe. This has raised production costs at scrap-consuming mini-mills. The short supply of iron ore, pig iron and coking coal has raised production costs at blast furnace-based steel mills. The analysts at World Steel Dynamics in Englewood Cliffs, N.J. describe “volcanic price increases” impacting such steelmaking raw materials as ferrous scrap, iron ore, molten pig iron, coking coal and coke.
Peter Marcus, cofounder of WSD, says “It’s the most severe and widespread shortage of steelmakers’ raw materials in the history of the industry.” Atop that, bulk ship rates are soaring. Customs brokers report that daily rates are at record highs of $35,000 for Capesize ocean carriers. These are the gigantic bulk vessels with dead weight up to 230,000 metric tons, which shuttle iron ore or coal between Brazilian mines and European or North American steel mills, or from Australian ports to Asian steel complexes.
Meanwhile, blast furnace steelmakers, who also have been stung by higher-priced iron units (scrap, imported iron ore and pig iron from South America), now are running short of coke at any price. Coke is metallurgical coal that has been baked in the absence of air and is used as a source of carbon in blast furnaces that produce molten iron, the precursor of raw steel. U.S. Steel has been forced to reduce coke shipments following a fire at the Pinnacle (metallurgical coal) Mine near Pineville, W. Va., which supplies U.S. Steel’s coke-making plant in Clairton, Pa. This reduced production from U.S. Steel has aggravated an already worldwide shortage of the material. In fact, Rouge Steel Co. was just the first of several mills forced to cancel some hot-rolled sheet business when the Dearborn, Mich. producer declared force majeure on part of its first-quarter order book.
There’s not enough steel
Supply shortages are occurring in the U.S. for a number of reasons: delayed mill deliveries of fourth quarter orders, low inventories at the service centers, a seasonal pickup in demand by consumer and commercial manufacturing firms, an unexpected surge in demand from such metalworking segments as machinery and off-road equipment and a resurgence in demand by construction firms involved in nonresidential building projects. Yet, the disruptions in the stream of raw materials have prevented mills from increasing production. (American Iron and Steel Institute reports that adjusted year-to-date production through Feb. 7, 2004, was 10,544,000 tons, at a capability utilization rate of 82.8%. That is a 2.2% decrease from the 10,786,000 tons during the same period last year, when the capability utilization rate was 85.8%.)
Meanwhile, imports have been restrained by the weakening dollar and higher sales prices in other parts of the world. Global steel prices exceeded U.S. market prices for most of 2003; even today with U.S. prices rising, Chinese prices are $100/ton above the U.S. market. So, Chinese demand has had no trouble sucking up global tonnage, which is keeping demand tight and prices high in their home markets. These trends are not going to go away, so imports will continue to be in short supply and expensive for the foreseeable future, says Global Insight’s Anton.When asked if raw materials will become plentiful again and if prices will fall, Anton says: “For coke, it is not certain when the U.S.
Steel mine will reopen, and information is hard to come by. Industry sources indicate that the problem could persist at least through summer 2004. Once the mine reopens, it will probably require an additional quarter before coke is flowing freely. Thus, the shortage could last throughout almost the entire year. Scrap is likely to see relief much sooner than coke. Mills built scrap inventory late in 2003 to guard against weather-related shortages. Although the winter has been cold in the East, snow has been minimal, so transportation is still moving and the inventory will soon be ready to be drawn down. Also, high prices are already starting to create more generation as old factories and junked cars are sent to scrap yards. Scrap will not be as plentiful as in recent years, however, since demand from China is a permanent factor, and a weak dollar will promote exports over domestic consumption.” |
