Steel Prices

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Steel is a major input in the construction, shipbuilding, and automobile industries. China has been a major force in the steel industry. Chinese steel production has grown from 13% of world steel production in 1995 to 32% in 2005. However, China's demand for steel has grown just as fast, and it remains a net importer of steel.

The cost to produce steel varies from country to country, largely with the cost of labor and energy. Russia, India, Ukraine, Brazil are able to produce steel at the lowest cost because of a combination of cheap energy and labor. The US's costs are roughly middle of the road. Unlike many other commodities, China is not the lowest-cost steel producer. Chinese labor is cheap, but energy in China is still pricey. As a result, China produces steel at a cost 20% below that in the US, but energy costs in China are higher than they are in Russia, India, Ukraine, and Brazil.

It should be noted that the majority of steel is utilized by a fairly limited number of purposes. For example, in the United States eight industries consume over 90 percent of the steel used.^[1] In North America 2/3 of steel fabricated for consumption is recycled from previous uses.^[2]

[edit] Prices, Tickers, and Delivery Dates

Steel Futures contracts are traded on the New York Mercantile Exchange under ticker symbol HV and are delivered every month of the year. (For more information on commodity tickers, check out the commodity ticker construction page.)

Steel futures prices with a January, 2009 delivery date. US Dollars per ton.

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[edit] What impacts steel prices?

12 month trend of steel prices

How US steel makers are impacted by a $20 / ton increase in steel prices. Nucor and Dynergy's contracts with customers that fix their margins mean they are less exposed to price fluctuations than US Steel is.

China represents nearly a third of global steel consumption

China represents nearly a third of global steel production

• The price of steel is highly dependent on global economic cycles - when the global economy is heating up, steel prices tend to rise.

• New construction: Twenty percent of steel is used in construction. As a result, a key metric to watch to forecast future steel prices is property vacancy rates -- higher vacancy rates leads to less construction and lower demand for steel.

• Foreign demand: China's prodigious consumption has made it a net importer of steel. However, China's increasing self-sufficiency could displace a lot of imports and lead to price drops. For example, China is in a building boom. Fifty percent of China's GDP is spent on fixed-asset production -- things like roads, railways, bridges, and buildings -- compared to only 17% for the United States. This building boom will eventually fall off, leading to a drop in steel prices.

• Capacity: Increased capacity to produce steel signals lower prices in the future. As a result, capital spending by steel producers is often used as a harbinger of future steel prices - more capital spending today suggests more factories, more capacity and therefore lower prices in the future. Consolidation (steel companies buying each other or going out of business) suggests steel will become less plentiful and therefore more expensive.

[edit] Companies that benefit from rising steel prices

US Steel, Nucor, and Steel Dynamics are the largest American steel producers. When prices rise, they make more money on every ton of steel they sell. US Steel benefits more from rising steel prices than Nucor and Steel Dynamics, however. Nucor and Steel Dynamics' pricing strategy is to sign adjustable-rate contracts, where the price they are paid varies with the price of inputs such as scrap steel. This means their profits are reliable when prices fall, but means they have less upside when prices rise.

US steel is far more exposed to steel prices than Nucor and Steel Dyanmics. Nucor and Steel Dynamics' strategy has been to lock in spreads in long-term contracts with customers -- the companies pass along increases in raw material costs to their customers, but have limited upside when steel prices rise. Smaller steel producers, such as AK Steel Holding (AKS), Commercial Metals Company (CMC), and Carpenter Technology (CRS), are also beneficiaries of rising prices, although obviously in proportion to their relatively smaller market share.

Steel companies aren't the only parties that benefit from higher steel prices. The companies that provide them with raw materials, such as the major iron ore supplier Cleveland-Cliffs (CLF), enjoy the rise in profits as well. Similarly, companies like Harsco (HSC) that provide the steel industry with mill services benefit as well.

[edit] Companies that benefit from falling steel prices

• General Motors, Ford, Toyota, Nissan, Daimler-Chrysler, Volkswagen, Harley-Davidson and other Auto Makers benefit from falling steel prices, as it is major cost in the production of cars, trucks, and motorcycles. 20% of US steel production goes to the automotive industry, and ~65% of the weight of a car is steel.

• Shipping companies must purchase new ships to replace those reaching retirement. For many shipping companies, like Diana Shipping (DSX), DryShips (DRYS), Eagle Bulk Shipping (EGLE), and Genco Shipping (GNK), acquiring and constructing new ships is the only way to grow.

• Construction companies engaged in industrial and infrastructure projects require steel as a key building material. These companies include KBR, Inc., Fluor, Granite Construction, and other large and small firms. Certain real estate investment trusts that purchase and develop properties for re-sale, like Boston Properties, HRPT, and Colonial Properties Trust could also benefit as lower materials costs in construction increase profit margins when the properties are sold.

Top 10 Steel Producers in year 2007