Steel buyers accustomed to prices falling in 2015 better not get used to it. It appears steel prices are going to stay about where they are for a while.
That’s good news for buyers who purchase steel in North America. While prices may rise another $30 to $50 per metric ton in the early months of 2016, analysts do not expect them to reach heights buyers last saw in 2008.
The news is not good for suppliers, the steel mills in the U.S., that have had to compete with producers in China where demand for steel has fallen, but output has not. A glut of Chinese steel has kept prices low, which has enticed some buyers in the U.S. to purchase from the country. Help for U.S. producers, though, in the form of tariffs, appears to be on the way. As for buyers who purchase steel in China, they won’t be pleased with this headline.
Once decisions on tariffs are made, John Anton, Principal Economist at IHS Pricing & Purchasing, expects mills in the U.S. to seize the opportunity to raise prices and increase production. As the ferrous metals industry analyst sees it, one will cancel the other out. He’s forecasting the $30 to $50 hikes, and suggests buyers with contracts coming up in 2016 to use current prices (November 2015) as the basis for new negotiations with producers.
For steel buyers who last negotiated a contract in 2014, Anton suggests not referring to the past decade when setting prices for 2016. “Buyers’ point of reference should be right now,” he says. “If they let producers use 2014 as part of a negotiation, they will overpay, and they are due very large price declines.”
If the seller won’t let the buyer use the current price to negotiate, Anton advises using “the average price for 2015. No part of 2014 should have anything to do with 2016,” he says. “It was a sled ride. Buyers are not at the top of the hill and they shouldn’t allow anyone to charge them as if they were.”
Global Steel Market
Steel prices dropped in 2015 for one simple reason: Oversupply. A slowdown in the real estate and auto industries in China and a lackluster recovery in construction in Europe are contributing factors on the world market, says Kumar Amit, Associate Specialist at The Smart Cube. China, the largest producer in the world, is reacting by exporting large volumes of steel. Meanwhile, the price of iron ore, a key raw material, fell below $50 per metric ton in the first half of 2015, prompted mills to keep operating rates high, driving up supply.
It does not appear demand will increase in 2016, he says, pointing out that the World Steel Association in its Short Range Outlook (October, 2015) expects global steel demand to grow approximately 0.7% year-over-year in 2016, after registering a drop of approximately 1.7% year-over-year in 2015.
A closer look shows demand from European and U.S. construction and auto industries is likely to grow modestly in 2016, while in India, the development of infrastructure, increased spending on industrial projects, and interest rate cuts by the central bank will likely fuel steel demand growth. Products needed to meet these demands include flat steel and structural steel. On the flip side, huge spending cuts in the oil and gas industry are dampening demand for oil country tubular goods (OCTG). At the same time, demand for steel will likely remain weak in China.
Other factors, according to The Smart Cube, that could affect the global market steel buyers may want to watch include:
•Volkswagen’s emissions scandal which could weigh on vehicle production—and steel demand.
•Capacity mothballing by major producers and potential closures in all regions of the world, including China, which could support steel prices in the first half of 2016.
•A tax cut on passenger cars with less than 1.6-liter engines in China could help revive growth in the country’s auto sector and spur demand for steel. According to Credit Suisse, the tax cut stimulus will lead to an annual rise of 3 million units in passenger car sales.
Steel Pricing Trends
Analysts at IBISWorld use three-year periods to measure activity in the steel market. In the current period, 2012-2015, Sean Windle, Procurement Research Analyst, estimates that steel prices have fallen 4.9% on average per year. Like his counterparts at IHS and The Smart Cube, he cites oversupply due to the slowdown in demand from China, and the glut of iron ore and coal used to make steel.
“Another factor, which is always present and definitely having an impact on the past three years, is the dollar’s appreciation relative to some U.S. trading partners,” Windle tells My Purchasing Center. “That has made U.S.-made steel more expensive relative to countries such as China.”
IBISWorld’s forecast has steel prices rising on average 6.1% per year during the next three-year period, 2015-2018. Windle tempers that: “As a commodity, steel is subject to volatility so the forecast could change.”
Prices are expected to rise, he says, because the market is going to work through the oversupply. “We will probably see supply match more closely with demand over the next three years, starting in 2016. It’s already happening, but we won’t feel the effects on price until the new year.”
Windle too suggests buyers expedite purchases or lock in current rates. “While it’s hard to say with compete certainty, we expect the most significant growth in steel prices will happen in 2016 and 2017,” he says.
He also reminds buyers of their role in helping to mitigate risk along the supply chain by suggesting they watch the financial health of their steel suppliers. “The huge influx of imports which is forcing U.S. producers to decrease prices is putting financial strain on suppliers,” he says, pointing out that earnings are down significantly at some of the nation’s largest producers.
“As imports force lower prices and supplier profits are squeezed, buyers may have a harder time negotiating because of declining costs,” he says. “Tighter margins are going to make suppliers less willing to acquiesce to discounts and possibly other incentives. When signing a long-term contract buyers want to make sure the supplier is doing things to weather potential future storms.”
Costs to Produce Steel
The cost of making steel has fallen significantly.
The price of prime grade scrap steel which is used by producers in the U.S. to make steel for construction was about $440 per metric ton last year, and held stubbornly high until October 2014 when it fell $20 a ton. Then it fell another $20 in November. It took a pause and then recently collapsed to under $200.
“Scrap is not a perfect substitute for iron ore, but if the price of one gets out of whack with the other, it is going to follow, says Anton at IHS. “The U.S. exports huge amounts of scrap, which helps keep price up. Turkey stopped buying scrap from the U.S. and started buying refined ore products from China, helping to push the price down about 25% in October 2015, and it’s still easing down. It’s about $200. The total decline between what happened a year ago and what’s happening now means prices are down about $220 to $240.”
This translates almost directly into the price that electric furnace mills can charge for steel, Anton says, seeing a fundamental, long-term, change in pricing.
“We can compare steel pricing now to 2008, but that doesn’t tell the whole story, he says. “2009 was a blip because of the recession. Prices popped back up. Now, we are seeing an undoing of a decade of high pricing that I see as more or less permanent. What we see now is what we will see for the next 5-10 years. There will be up and down cycles. Pricing trends will be jagged, sawtooth at current levels, which are 30% to 40% lower than average levels of 2005-2014.”
Anton says that U.S., Canadian and Mexican steel prices are still higher than Europe, by about $100 a ton, and Europe is higher than China, by about $100 a ton, making North America still about $200 higher than China. But, 12-14 months ago, the U.S. was $400 or $500 higher than China. It’s still huge, and imports are very high.
Protection: What it Means to Buyers
Protection for some steel products is coming. Anton expects in the first quarter sheet steel from China will be hit with duties of at least 100% which will double the cost, or, and it’s likely because it’s happened in the past, 200%, which will triple the cost. Effectively, Chinese steel hit by this will not sell in the U.S., he says.
“I think Chinese steel, at least sheet steel, and probably other grades as well, will be knocked out of the U.S. market. Steel producers are thinking this will get them some huge price increases and they could use price increases.”
However, Anton does not see this happening. “Let’s say tariffs get to the point where China can not sell anything here. That’s 20 million tons coming from China that someone has to provide. That doesn’t mean that Korea or other countries can’t do it.
“If U.S. mills sit pat and don’t increase production, they get a price increase that will hit buyers in the first quarter,” he says. “I don’t think this will happen. They will increase production, and try to raise prices. I’m thinking the mills will push for a price increase no one will want to pay. Essentially prices came down $200. They will go up $30 or $50 at the most.”
For buyers who have been sourcing in the U.S. and keep sourcing in the U.S., it’s an annoyance, but not a big deal. But for buyers who have been sourcing in China and now have to source in the U.S., it’s a really big deal. They’re going to see a really big jump in pricing.
Anton recommends steel buyers look to the International Trade Commission website for current and pending anti-dumping action to see if the products they buy are covered. The information is listed by product, by country.