ISRI ROUNDTABLES: Stoking Chinese Furnaces

In the past three years, the steel industry in China has grown so rapidly that both global suppliers and competitors have had to make quick adjustments, according to speakers at the ISRI Ferrous Roundtable session of the ISRI Commodities Forum, held in late September near Chicago.

The period of rapid growth in China may finally be winding down, according to Randy Cousins, a steel industry analyst with BMO Nesbitt Burns in Toronto. The rate of steel capacity growth “has eased,” according to Cousins, for several reasons, including pollution control, the tightness of raw materials supplies (such as iron ore and high-priced scrap) and energy shortages. “They are facing infrastructure issues . . . that are a serious impediment,” he remarked.

Cousins predicted that steel prices will trend down in 2005, with hot-rolled steel more likely to be in the $450 to $500 per ton neighborhood by the end of next year. He also predicted scrap prices would pull back to around $150 per ton by the end of next year, as supply issues driving the market (a scarcity of iron ore, coke, energy and scrap) could ease as the world adjusts to China’s new demands.

China’s quick move to the top of the global steelmaking charts has caused a spike in steelmaking supply costs, including a surge in ferrous scrap pricing throughout 2003 and into 2004.

At the same time, the Chinese economy’s consumption of finished steel (along with the accompanying global rise in scrap and iron ore prices) has lifted steel prices after years of steel pricing staying in a cyclical trough.

Cousins said that—even with higher scrap prices—North American steelmakers are enjoying a $450 spread so far this year between what they are paying for a ton of scrap versus what they can fetch for a ton of hot-rolled steel. This is much more enjoyable than the $170 spread they had in 1998.

A spread of a different sort pits the $645 per ton being charged for a ton of hot-rolled steel in North America versus the $343 average cost for a ton of steel produced in China. Cousins questions whether that is a sustainable gap in global markets, though he conceded, “Steel doesn’t travel well, so there are still regional differences in price.”

The message of I. Michael Coslov, chairman and CEO of Tube City LLC, West Conshohocken, Pa., was that ferrous scrap dealers will have plenty of business this year and next whatever happens in China.

“True, China has had a big impact on raw materials,” said Coslov. But he said scrap prices in the U.S. zoomed up because electric arc furnace production in North America “came back on so fast, people overestimated the reservoir of scrap.”

A lesson for steelmakers, said Coslov, is not to abandon the production of alternative iron (or scrap substitute) products when markets recede. “You don’t stop production at an HBI or DRI plant because of a price [slump],” he remarked.