Steel Prices Take a Hammering

Spend Matters welcomes a guest post from Nick Peksa, at Mintec Ltd.

Steel prices have been falling, weighed down by weak global demand, over production notably in China, and lower prices year-on-year for feed stocks such as coal and iron ore. Restrictions on capital intensive building projects, lacklustre demand for steel and high levels of steel production have depressed the global iron ore market and reduced prices for coking coal year-on-year.

China is the world's largest producer of steel and the largest consumer and importer of iron ore. It has a major influence on the price of crude steel since much of the global steel industry has shifted there from the US and Europe in the past two decades.

The cost of raw materials, notably iron ore, is another key price driver. In contrast to steel, the iron ore market is dominated by three global companies controlling about two-thirds of the world's seaborne trade. Iron ore suppliers can therefore exercise a considerable bargaining power over steelmakers.

China's iron ore imports fell to 57.9m tonnes in July down 0.8% on 58.3m tonnes in June. Steel production in China fell by 2.2% over the same period, as steel makers have stepped up maintenance in an effort to cut record production and curb losses on high inventories. Coal prices have been rising in recent weeks, however, due to increasing world demand despite relatively plentiful world supplies. This might help to raise the cost of steel in the longer term.

Steel competes with lighter materials such as aluminium and plastics in the motor vehicle industry; aluminium, concrete, and wood in construction; and aluminium, glass, paper, and plastics in containers. The price of these possible substitutes, which have all also been tending to fall year-on-year, can therefore have a bearing on the price of steel.

Global steel production amounts to around 1,400m tonnes each year. Production has been expanding at the compound average growth rate of 4% in recent years. China is responsible for about 46% of the world crude steel production, followed by the EU (12%). Japan and North America have a share of about 8% each.

World steel consumption is dominated by Asia with about 70% share of global apparent steel consumption, followed by the EU (12%) and North America (7%). Japan and China are the world's largest steel exporters with about a 15% share each. These are followed by the EU and Russia.

As a barometer for the global economy steel looks like a good bet, so let's hope it doesn't keep sinking like a lead balloon!

- Nick Peksa, Mintec Ltd.

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