Businesses will have to wait for relief on steel prices until next year when the dollar is expected to strengthen.
By Jim Ostroff, Associate Editor, The Kiplinger Letter
How much higher will steel prices go this year? Quite a bit. The largest steel users can expect to pay as much as $1200 a ton for hot-rolled steel and $1300 for cold-rolled by July, about twice the cost in January. Small companies should figure prices will be about $200 higher than those, a typical premium for purchasers with less buying power.
The spike will wallop makers of cars, trucks and tools, as well as residential and commercial builders, with no relief likely before fall. And with the economy so weak, these companies can’t hope to pass along much of the costs to consumers. Highway and municipal building construction firms could get badly singed because they typically sign fixed-price project contracts with state and local governments.
Some price pullback is expected next year. After summer’s peak, hot-rolled prices will fall to $900 per ton by December due to the usual seasonal slackening in demand. But prices should get the stool kicked out from under them in 2009, once the dollar starts to post firm gains against most other currencies, as we expect, making imports more attractive.
“The first time steel mills ask for an increase and don’t get it, prices will crack like Humpty Dumpty,” says John Anton, steel service manager with Global Insight, an economic consulting firm. Next year, hot-rolled steel prices should average about $650 per ton and may well dip to $550 by December 2009, compared with about $825 in 2008.
Of course, a scenario that includes a stronger dollar and lower steel prices assumes China and India don’t suddenly decide to ratchet up manufacturing and that labor problems don’t shut down coal or iron mines in Australia.
Blame the devastated dollar for much of this year’s pain in steel pricing. Brazilian and Australian suppliers of key steelmaking ingredients iron ore, iron pellets and coking coal have boosted prices more than 60% since January to offset the buck’s decline. Further sharp price hikes are certain by midyear.
Domestic prices for scrap metal used in mini-mills that make about half of U.S. steel have soared 80% since January, due largely to anxiety-ridden consumers who are hanging on to old junkers that should be heading to auto scrap yards.
That’s turned the tables on the steel market. With foreign steel mills now the world’s high-price manufacturers, shipments to the U.S. have slumped this year, giving domestic steelmakers newfound pricing power. “Due to the slumping economy, U.S. steel demand is terrible with a capital T, but domestic mills’ business is strong because companies aren’t buying much imported steel,” says Charles Bradford, president of Bradford Research, a steel consulting firm.
But the pricing power has come at a cost. “We’re seeing a vicious circle where prices will remain high until steel inventories are worked down, cutting demand, but steel [buyers] aren’t building large inventories because they don’t want to get stuck with expensive steel should prices decline hard,” keeping prices up, says Anton.
The result: A monkey wrench has been thrown into the steel pricing cycle. Since January 2008, steel prices have climbed precipitously, and the economy remains weak. Manufacturers and other steel users still have demand for steel, but expensive imports aren’t much of an option. Steel users continue to buy steel, but they’re keeping inventories low because they believe the dollar will strengthen and prices for key steelmaking inputs such as iron ore will fall sometime later this year.
Steel users don’t want to get stuck with steel they bought for $1200 a ton if prices fall to half that amount. With steel inventory strategies turned upside down, steel users will have to keep paying up for the commodity until the dollar begins to recover.