Perhaps no metal had as dramatic a ride as steel during 2008! What started as moderate pricing $600+/ton for hot rolled steel last January, shot up to $1200+/ton in July (cold rolled coil also doubled in price from January through July). And today, steel prices have the appearance of “normality” at $520-545 ton for hot rolled coil and for carbon plate pricing in the $880 range according to Purchasing.com. Some strip mill plate is down in the $520 range. Our own MetalMiner IndX(SM) shows the China price at similar levels for hot rolled coil at $555/ton. Cold rolled coil traded at $640 ton on Friday whereas plate products traded at $662/ton. And all of these price points lead to one question: what will the market bring in 2009?
To answer that question, we digress by walking through several pieces of data to help us form our conclusions.
Unlike some of the other base metals which are traded on exchanges such as nickel and lead, steel still lacks a futures market (though we are hopeful that the LME billet contract and Nymex HRC contract will begin to move the industry in that direction). Speculation, therefore, plays a smaller role in price setting within the steel market. Good old fundamentals, we would contend, such as supply and demand still greatly impact the price of steel. But perhaps a bigger determinant of steel pricing relates to the behavior and strategies of the largest steel producers. And in all fairness to the steel producers, they are doing whatever they can to create a steel shortage. We know that sounds preposterous but hear us out.
The steel mills have been very quick to pull capacity offline in an effort to better match supply with demand. And though prices have fallen, we would argue the rate of decline has started to slow. For example, by looking at the CRU North America Steel Price Index on a monthly basis from January 2007 until now, we can see a flattening of the curve:
So the rate of decline has started to slow. And yet using our integrated steel cost build-up analysis, our steel production cost analysis went from $423/ton back in late November to $358/ton today. Back in the late summer that model was at $592/ton. Again, these are production numbers and not inclusive of steel producer profits. The analysis helps to better understand the cost drivers to producing one ton of steel. Declining coking coal prices led the drop in general, followed by steady iron ore price declines. We say steady because our model has the price at $70 ton (which is a representative spot market price) though many steel producers are still tied to contracts at higher numbers. The spot price had actually dipped in the late fall to $65/ton and has since rebounded slightly. The other interesting aspect of the change with iron ore prices relates to how buying organizations enter into and negotiate yearly contracts. Historically, these contracts are set on an annual basis with negotiations really getting underway after the Chinese New Year with contracts in place for April shipments. The Chinese, however, are the first to push back on this process requesting a more flexible pricing model with quarterly price adjustments.
Another analysis we like to conduct looks at where the price of steel is in relation to its historical average. We’ll cover that analysis in tomorrow’s post. But in the meantime, this chart, also the CRU North America Steel Price Index only this time on a quarterly basis for the past seven years, suggests that current market pricing appears to fit within the range of pricing between the years 2004 and 2008 before last year’s price spike.
As many buyers know, the super-cycle for steel pricing began during the fourth quarter of 2003. So today’s steel pricing still remains well within the super-cycle price range. We’ll cover this a bit more tomorrow, the role of imports on domestic steel prices and supply and demand within key end user markets. Finally, we’ll offer our actual price predictions.
In the meantime, if you are interested in taking a look at our steel production cost model, drop us a line at lreisman (at) aptiumglobal (dot) com. We’d be happy to email it to you. If you are interested in tracking the price of steel from China, register for our free pricing service, MetalMiner IndX(SM) at the top of this website.
–Lisa Reisman & Stuart Burns