The steel industry has been in a kind of funk this year, as frenetic production in Asia has flooded global markets with cheap steel the once-burgeoning American auto and construction sectors want less and less of now. Storm clouds are building on the horizon, however, as a flood of Asian mill bankruptcies threatens to tighten capacity and create downstream supply chain risks.
For now, steel is a buyer's market, and some analysts are saying now is the time to lock in.
Surging Capacity Keeps Prices Down, At Least Stable
Progress in the steel industry in recent years has undergone a healthy recovery no doubt, though any benchmarks analysts use to describe that recovery invariably are compared to the progress it could have experienced had the 2008 Wall Street collapse and subsequent Great Recession never happened.
"[An] approximately $500 billion annual spend rate pre-recession fell to about $330 billion, and now it's up to about $410 billion," John Anton, manager of IHS Steel Service, told My Purchasing Center. "It's come up a lot, but it still has a long way to go. Our forecast has it getting back to pre-recession level by the end of 2016. It's a 'half-empty, half-full' scenario. The half-full part is things are rising rather quickly. The half-empty part is you're still not sending nearly as much steel to construction as you did pre-recession. Certainly more than you did two years ago, but not what you sent in 2007 and early 2008."
No discussion of that recovery excludes the impact brought by the rebound of the automobile and construction industries -- its two biggest drivers and consumers -- without which the steel business would still look very much like it did in 2009. That was a very dark year for steel and just about every other output that shapes the economy.
According to IBIS World's 2014 assessment of the global steel business, the global economic crisis had "dramatically reduced" iron and steel demand by the beginning of that year, mostly because of the suffocating contraction of the nonresidential construction and auto industries that was marred by a near-50 percent drop in revenues.
The turnaround was nearly as dramatic as the fall and by 2010, the steel-hungry auto industry began pumping out cars again, fueling 44 percent and 21 percent revenue gains in 2010 and 2011, respectively, according to the firm.
For nonresidential construction, the spike was short-lived and by 2012, analysts began seeing the industry downshift from third to first gear. In overseas markets, the problem was significantly worse. Even in 2014, revenues in the commercial construction markets were dropping nearly 3 percent. Margins among just about every industrial category have been hammered by incessant and surging raw material costs (primarily iron ore); iron and steel mills suffered with nearly 8 percent increases in raw material costs in 2014, according to AlertData.com.
But by the beginning of the fourth quarter this year, prospects for the global iron and steel industries looked significantly brighter, fueled in large part by rising downstream demand and a surge in exports.
Nowhere is the world's thirst for cranking out steel stronger than in China, which has spent the past several years producing more steel than anyone knows what to do with (adding more than 20 million metric tons of capacity the first nine months this year alone, according to IHS). That country produces more than half of the world's steel supply. One big downside: Many Chinese mills are teetering on financial collapse, even while they continue flooding world markets with some of the cheapest steel on the planet. The overcapacity is so severe, in fact, virtually no Chinese mill has the appetite, or ability, to even consider raising prices.
Today, import competition from China continues keeping prices low. Many analysts, meanwhile, are beginning to hint that the honeymoon may be coming to an end sooner than later.
First, let's look at recent history of prices.
In January, prices for finished steel goods (particularly fabricated steel) began creeping north, but not enough to raise eyebrows. Many, including those at IHS, viewed the uptick as short-lived, and by midyear, prices calmed down. In fact, while prices crept up with iron and steel mills (4.6 percent), iron and steel pipe (less than 1 percent), and rolled steel sheet and bar (around 2 percent), prices overall across all three sectors have been falling on a year-over-year basis, according to AlertData.com.
The capacity issue might be less of an issue if it wasn't for the short-living surge in nonresidential construction. By 2012, that part of the business began heading south. As a result, downward pressure on prices continued to be a dominant headline through most of 2014.
Still, many analysts today may be scratching their heads about how, and why, North American steel prices are so high. For example, A36 plate steel (a low-carbon, high-strength steel used in cars) sells for around $800 per metric ton in North America, compared to slightly more than $500 per metric ton everywhere else. Similarly, North American generic bar steel goes for about $200 per metric ton more than everywhere else.
"Steel prices in North America are completely out of whack compared to the rest of the world," Anton told My Purchasing Center.
Even to recognized steel experts like Anton, the phenomenon can be puzzling. But he has one explanation: fears that prices will plummet if buyers turn more to foreign steel.
"[Steel] imports are the highest they've ever been since 2006 and there's still not enough to bring prices down because people are just now buying it and many of these price differentials have been going on for four to five years," he said. "It's easy for anyone to have a cynical response to why buyers are overpaying [for American steel]. Perhaps people are afraid that somehow the U.S. price for steel will suddenly collapse and if you order the import at $600 even though it's $800 in the U.S. that the U.S. price overnight will fall to $550 and you'll have to take delivery of $600 foreign steel."
Anton asserted that North American steel prices haven't fallen dramatically in the past five years and said he doesn't expect them to fall dramatically the rest of this year. Even with the so-called fears of a North American price collapse, the robust rate of imports still hasn't caused prices here to plummet, he added. "They've actually been up," he said. "Most prices have been far higher since 2011, and quite a few have been far higher since 2009.
"Here in the U.S., [steel] prices have been trending sideways to upward in 2014 and globally they've been drifting sideways to down," Anton added. "This should continue for the remainder of 2014."
A Look at the Year Ahead
In its current market assessment, Ernst & Young predicts the year ahead will see some transformative shifts in the markets as steelmakers confront such challenges as "volatility, shifting demand centers, complex supply chains, productivity, and cost efficiency." The most noticeable shift will be a dramatic increase in market competition, notably among "high-value and higher-margin" steel products, the firm noted. Emerging economies in Asia, for example, also will lead to demand surges (from autos and construction, for example) that could help bring down the excess capacity. Stateside, booming energy markets will continue quenching their thirst for steel in drilling.
Meanwhile, Anton sees the recent drop in raw material (particularly iron ore) prices to continue in the coming year - to just under $100.
But most analysts are eyeing the fate of Chinese steel mills with great zeal. Unless the Chinese government steps in to keep many of them solvent, the strength of the capacity tsunami may finally be broken.
"What I actually expect next year is a massive number of steel mill bankruptcies in China and possibly Europe," Anton said. "They're already starting to occur and they're selling at or below cost. And they're running with empty bank accounts. Most steel mills in North America are either at break-even or making decent but minimal profits and they're selling for 10 percent to 20 percent higher than the Europeans. So if we're just breaking even, what must that say about European and Chinese profitability? You're facing even weaker prices in China."
Consequently, the last remaining months of 2014 and very early 2015 are the best time to buy steel in quite a while, according to Anton. "At worse, prices will go sideways or go down just a little bit, so I've described it as a one-sided bet," he added. "The chances that prices here will go up by 10 to 25 percent are the odds of rolling the six through boxcars. Even if prices do go down, they won't go down much. In Europe or Asia, they can't go down. They're selling at cost or below right now."
That said, buyers should be bracing now for a bit of a ride in 2015.
"Price increases I foresee will be ugly for steel buyers' budgets. No question," Anton said. "But historically, they're far more volatile than we've seen the last three to four years, but those were some of the lowest volatile years for steel since I've been following it."
Should a flood of Chinese mill closures come to pass, Anton predicts tighter availability, longer lead times, and a spike in prices in 2015. "I expect steel plate to go up easily between $150 and $200 in China, and possible by only $100 or less in North America," he said. "But that still means North American prices will be higher than Asian prices. So Asian and European prices may catch up and close the gap in pricing but they won't fully close it. So Europe and Asia don't come up all the way to the U.S., but they do come up more in absolute dollars and far more in percent terms. Basically, North America is already high and has less headroom.
"Historically, these would not be big swings on a percentage basis," Anton added. "It's just we've become very accustomed to small swings. If you're buying a generic product like rebar, and as long as you're not buying from one mill and one mill only, you'll probably be fine."
Which brings Anton to his final cautionary note: Sole-sourcing will be a "risky or dangerous proposition or risk" in 2015.
"Sourcing aircraft-grade steel won't be an issue, but "if you're buying sheet steel for automotive or rebar steel for construction or plate for pipeline projects, sourcing could get a little sticky and the fewer people who make it, if one goes down, the other guys may have a full order book and won't be able to step in," he added. "The mills aren't going to disappear. What you don't want is to be in a situation where your supplier goes out."
The danger is greater in Asia, particularly China, and Europe, than it is in North America, where prices are considerably higher and the supply chains are in far less distress, according to Anton. "The further up the steel supply chain you go, where you have to qualify your supplier and make sure you know what you're getting, if you're sole-sourcing and your supplier goes out of business, you have to scramble for a new supplier," he said. "And if you are a big company and you don't buy steel or you buy some steel but you also buy a lot of valves and your valves supplier has their steel guy go out of business, you're still up the creek because you can't get the valves. So even down the supply chain, it could be a problem. I am as much or more worried about availability than I am on price.
"Make no mistake, price will be ugly in 2015," Anton added. "It won't seriously hurt someone's budget, but for a well-run company, it shouldn't be something they can't tolerate."
As mentioned before, a very high-profile overture by the Chinese government to shore up its vast network of steel mills could keep cheap steel flowing throughout most of the world. An effort from the U.S. government to bring more parity to North American prices and the rest of the globe, meanwhile, would change the price equation considerably.
"The only way steel prices can come down markedly here is if North America starts equalizing with international prices," Anton said. "But it hasn't done so in four to five years and I don't see a big push for it to do so next year. And if bankruptcies don't happen in China and the government bails out their steel mills, that means prices stay very low at least until mid-year and if the Europeans fail, prices will rise. If China doesn't bail out the steel mills, they start going bankrupt this year and early next year and prices go up."
This article was originally published at My Purchasing Center and has been republished with permission. For more stories, visit MyPurchasingCenter.com.