Steel Prices Expected To Moderate Slowly

November 18, 2004
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WASHINGTON - The soaring price of steel is forecasted to gradually come back down to earth. But it's going to be a long, slow decline.

At the National Association of Home Builders (NAHB) Construction Forecast Conference, John Mothersole, an economist and senior member of Global Insight's Industry Practice, spoke about steel as it relates to building materials. But his comments on steel price trends and the pricing outlook are also of significance to HVACR manufacturers, distributors, and contractors.

There has been a tremendous acceleration in commodity prices during the past year, according to Mothersole. But he believes that "We are going through a traditional commodity price cycle.

"Commodity prices are topping out and moving on a downward slope. However, the bad news is that the ride down won't be too steep in 2005." Price levels at the end of next year are still going to be comparatively high, he said.

He noted that steel mill products have gone up 43 percent over the past year. Fabricated products are going up "40 to 50 to 60 percent."

John Mothersole said, “Commodity prices are topping out and moving on a downward slope. However, the bad news is that the ride down won’t be too steep in 2005.”

China A Big Factor In Price Rise

Why have commodity prices risen so sharply? Mothersole pointed out that there has been an economic recovery in the United States, synchronized with a European rebound, "which has been layered on top of phenomenal Chinese growth."

But he emphasized that prices have now reached their peak. Prices react to changes in demand, he said, and the markets are behaving normally. Higher prices are bringing added production.

The story for steel prices is that global demand has exceeded global supply, Mothersole stated. The steel market must be viewed globally. United States steel consumption is only 13 percent of the global total, he noted. "China is now almost three times larger in production and consumption."

The United States does not have enough capacity to meet its own needs and must import between 20 percent and 30 percent of the tonnage it uses each year. Therefore, international factors cannot be ignored; they will often dominate in the future, he said.

Global steel production is actually up by 40 percent since January 1995, said Mothersole. "But raw materials expansion did not keep pace." There was excess capacity in raw materials (ore, coke, etc.) and profits were not attractive. Eventually, furnace capacity hit the raw materials constraint. This is why steel prices exploded, he indicated.

Shipping capacity has also been strained, causing transportation costs to jump. "A year ago, a tanker cost $35,000 a day. Today, that cost is $135,000," related Mothersole.

A weaker dollar changes the trade in finished steel, he added. Imports will be the choice of last resort. Exports will be a viable market. Dependence on imports may be untenable in the future, Mothersole noted.

For his steel price outlook, he said that "prices will start to fall in the fourth quarter and continue to ease through 2005."

The downward pressures on prices include imports, inventory restocking, and the fact that the global steel price is lower than in the United States. Upward pressures on prices include shipping expense, the China wildcard, the global supply of raw materials, and the dollar.

"We expect more significant price declines in 2006 and 2007 as ore and coke become more plentiful," Mothersole said.

Publication date: 11/22/2004

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