NO CHEAP STEEL EXPECTED IN THE MEDIUM TERM

It is becoming ever clearer that steel producers and consumers can expect no relief, in the near term at least, from the upward pressure of costs for steelmaking raw materials and other inputs. While steel production rates continue rising, raw material supplies will remain tight, and that means higher costs.

Another sizeable jump in iron ore contract prices is anticipated in 2005. Expectations vary, but even the most wary and modest forecast is for a double-digit percentage increase. Some market-watchers believe prices could rise by more than 20 percent.

Steelmakers dependent on imported iron ore are taking steps to secure future supplies by new long-term agreements. In some cases, mills are buying equity positions in iron mines to guarantee supply. Chinese steel producers, who collectively have the world’s largest appetite for imported iron ore, have been scouring the globe for Fe-bearing materials. Suppliers that have been out of the market for years, such as those in Sierra Leone and Liberia, have successfully sold ore to China this year.

Iron ore supply could become easier in 2006 or 2007 when some of the mine expansions come on stream. But this does not necessarily mean prices will fall back to their early-2000's levels. Three companies control 75 percent of global iron ore supply, and they are unlikely to respond to the present high prices by creating excessive capacity.

In coal and coke, supply conditions are tighter than in iron ore. The global market for hard coking coal was under-supplied in both 2003 and 2004. It is expected to remain in deficit in 2005 and probably in 2006 as well. Steel producers can therefore expect to pay considerably higher prices – some forecasts are for contract prices to double in 2005, adding an estimated $US35 per tonne to steel production costs.

A recent survey by the International Iron & Steel Institute showed the availability of coke is even worse. Physical shortages are likely to continue, making coke the most critical factor constraining steel output. The spot coke price has come down to about $US250 per tonne from the peak of $US450 per tonne that it hit earlier this year. However, the price will not fall back to its “traditional” level of below $US100 while supply remains limited by a lack of coking capacity.

Other steelmaking inputs such as alloys have also gone up in price. The cost of ferro-manganese has more than doubled in the last twelve months. Ferro-chrome and ferro-silicon have also risen, as have tungsten, nickel and molybdenum.

Freight rates for dry bulk cargoes such as ore and coal have retreated from the all-time high that they reached in January this year. Nevertheless, it still costs about $US18 to transport a tonne of iron ore from Brazil to Western Europe: at the start of 2003 the cost was $US8 per tonne. Ocean freight rates are unlikely to fall back dramatically before 2007 when a significant number of new vessels enter service, providing a growing supply of shipping capacity.

All these production cost increases have come about since the steel price reached its last low point. Mills have been able to pass them on because of the strength of steel demand. However, when the demand cycle reaches a peak and turns down, buyers cannot expect steel prices to drop back to their previous lows. High input costs will put a floor under steel prices; the days of hot rolled coil at below $US250 per tonne are gone for the foreseeable future.

Source: MEPS - International Steel Review