As the year winds down, the first-year anniversary of this steel market is upon us. History is in the making. Not long ago we thought the current scrap pricing was just a short-term blip, not something that would occupy our business lives and conversation almost every day for a year. Then, just when we thought it had settled downUboom, scrap prices took a hike north again.
Economic recovery and growth worldwide hit on all eight cylinders for most of 2003 and into 2004, sending the world metallic markets into overdrive. We talk often of China, which has become the symbol of a more global economy, but it isn't hard to look just a little farther and see that this $1.4-billion economy and number two consumer of oil in the world has company. A mainly rural world is moving to the city, and what they see when they get there is America. The demand for steel that will supply the living quarters and work places for the 550 million people in China who will move to the city in the next 10-15 years is taxing the world's ability to supply the raw materials.
China will consume 256 million tons of steel in 2004, while the US will hit 110 million tons. In 2010, US industry is expected to consume 116.5 million tons of steel, while China will use 374 million tons. You can see that while China is adding significant capacity to fill its needs, the US is no longer the big player in this market.
Further evidence of global economic strength is demonstrated in the weakness of the US dollar. This weak currency position has not helped our steel supply. Strong demand has taxed the US production capacity, and a weak dollar has us at a disadvantage in the world market. Tight supply generates a rising base price. Four times in the past 12 months we have seen the base price of steel increased. One movement alone was $170/ton.
My bet is that we can expect this market to remain very strong in the near term – three to six months -- and strong throughout the balance of 2005.
None of this would have had a chance of occurring if the consolidation we have seen in the steel industry over the last three-plus years hadn't occurred. In early 2001, we had 50% of the industry in financial troubleUseveral in bankruptcy. Companies like LTV and Bethlehem were on the ropes and eventually were split up or acquired. The market share of the two strongest players grew from 2001 to today while a new player, ISG, was created. In 2001, no player had more than 15% of the market and no three combined for more than a 30% share. Today, the top three – ISG, US Steel, and Nucor – account for over 60% of market share. Pricing power has been restored to the industry, and strong demand has set the table. During the early part of the consolidation period, we lost over 14 million tons of capacity. Today, 8 million of that has been restored to production, but US industry, which traditionally imports about 25% of its supply, is still short 6 million tons of capacity to the pre-consolidation period. We can see the industry is getting healthy. Earnings have been good over recent quarters, but time needs to be on their side. Several steel company executives have stated that they will reduce capacity to keep prices strong.
The first of this year greeted us with new terms and a new business environment – the surcharge. Scrap prices were moving out of sight, and many raw steel producers, unable to keep up with the constant movement of price, instituted a surcharge to account for their raw material. It hasn't all been the fault of scrap. Coke, iron ore, and other alloying elements have been in short supply and seen price gains. This unforeseen addition to our business model has added just over $200/ton to the price of steel today. For much of this year, it has been pay the surcharge or get no steel. It doesn't look like things will change for some time.
So where do we go from here? Help is on the way for scrap substitutes, but plants currently under construction are at least 15-18 months away from first production. Additional steel facilities are on the build as well, once again with a 20-month or longer lead-time. Supply will respond as the market price remains attractive. In the near term, moderation of growth worldwide, whether caused by high energy costs or not, will ease the supply tension, although with little if any effect on price.
Will global demand for scrap ease and allow the surcharge to back off? We probably will see little action there. But my bet is that we can expect this market to remain very strong in the near term – three to six months -- and strong throughout 2005. Availability will become less of a problem but higher prices are here to stay.
Paul Vivian
Maverick Tube Corp.
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