Steel - Controlling Output
Many of the largest steel producers began significantly cutting output in the latter part of 2008. Reduced output is evident in the October 2008 crude steel production figures from the World Steel Association (formerly the International Iron and Steel Institute). North American crude steel production was 10.0 million metric tons (mmt), down 12.9 percent from last year. China production was at 35.9 mmt, down 17 percent. Worldwide, production was 100.5 mmt, down 12.4 percent.
Appliance companies saw a significant run-up in steel costs into the second half of 2008. Steel suppliers such as ArcelorMittal (Luxembourg; www.arcelormittal.com), U.S. Steel (Pittsburgh, PA, U.S.; www.ussteel.com), and Nucor (Charlotte, NC, U.S.; www.nucor.com) implemented and sustained price increases as global demand was reasonably strong. Nucor, for instance, reported average sales price per ton in the third quarter was up 51% from a year before, and up 21% from the second quarter.
But demand had begun to flag by the second half of 2008. Steel companies were quick to react. ArcelorMittal, the world’s largest steel producer, in September announced output cuts of 15% in some markets. Other steelmakers made similar moves or accelerated maintenance schedules that temporarily shut mills. Meanwhile, with demand drying up in other markets, some steel makers increased exports to the U.S. This had a downward effect on some prices there.
In the U.S. market, steel prices in 2008 escalated into the third quarter, observes Dylan Altieri, marketing manager at steel service center Denman & Davis (Clifton, NJ, U.S.; www.ddsteel.com), “Stainless steel, in particular, went up quickly, as much as 60 to 70%. But beginning in the third quarter, prices began dropping dramatically. For stainless steel in particular a lot of the decline has been in the surcharges. One result is that some appliance industry customers that had switched to lower-nickel stainless grades have returned to higher nickel grades like T316 and T304 when nickel surcharges fell.”
Nickel took a ride to a peak in mid-2007 of over $50,000 a metric ton on the London Metal Exchange (LME). November 2008 prices were down precipitously, to the vicinity of $11,000. Investors who needed to quickly raise cash during the financial crisis likely accelerated the fall by getting out of nickel and other commodities.
Surcharges for nickel in stainless steel have correspondingly declined. For instance, in December AK Steel (West Chester, OH, U.S.; www.aksteel.com) added 34 cents per pound for nickel on Type 304 steel. In August, the surcharge had been 79 cents. Overall, surcharges were 70 cents in December, down from $1.47 in August. Besides nickel, the surcharge was for chrome, iron, and natural gas.
China’s economy plays a huge role in prices of metals and other commodities. According on a The Wall Street Journal report, China in the last seven years has accounted for 59% of the growth in world demand for steel, 87% for zinc, 79% for nickel, and 60% for aluminum. But recession has cut exports, and Chinese consumers have backed away somewhat from the domestic housing market. The gross domestic product growth rate dropped to “only” 9% in the third quarter of 2008.
The hope of many commodity suppliers is that Chinese domestic spending, especially on infrastructure, will boost demand. In fact, the government has announced investment plans, including two trillion yuan (approx. US$292 billion dollars) on railroad projects, to spur economic growth. How Chinese infrastructure investments play out will have an important role in determining the shape of the commodities market in coming years.
Copper has been at a high enough price level that some HVAC makers have been redesigning their products to use less expensive aluminum parts. But copper prices have abated, down to $1.57 a pound in late November, compared to $2.88 a pound a year before, and around $4.00 at times during mid-2008. March copper futures prices on the COMEX look to be in the mid-$1.60s range. However, given the recent materials markets volatility, any futures contract prices should be viewed with caution.
When looking at aluminum sheet pricing, there are two components, points out J. Michael Murphy, sales and marketing manager, industrial products, Alcoa North American Rolled Products (Lancaster, PA, U.S.; www.alcoa.com). “The first is the value of the base metal, which is completely transparent, as it is globally traded and priced off the LME (London Metal Exchange). As with many commodities, there has been a rapid decline in the last few months, with prices down over 40 percent.
“The second component is the conversion price, which relates to the rolling mill process of converting the base metal to finished sheet," Murphy adds. "Conversion prices jumped a fair amount from the second half of 2007 through 2008 due to the incredible inflationary pressures mills were seeing. Causes included natural gas, petroleum-based lubricants, and alloying elements like magnesium and silicon. Since we are responsible for delivery, transportation also added tremendous cost pressure.
“Today, the mills’ cost factors are slowly improving and conversion prices are holding steady. How much of a difference a customer will see in conversion price largely depends on the level of specialization in the finished aluminum product. For example, a brushed aluminum sheet product that creates a stainless-like surface appearance commands a price premium over standard mill finish aluminum sheet.”
In North America, the mill picture is affected by industry rationalization and consolidation. “Today there is not nearly as much industry rolling capacity as a few years ago,” says Mr. Murphy. “This has resulted in relative conversion price stability, even as demand for aluminum sheet metal products has been down more than 10 percent, according to the Aluminum Association. While Alcoa does not provide formal pricing guidance, for the next year most industry analysts agree that LME prices have likely bottomed out as the current LME selling price is below the cost of a high percentage of global producers. As far as North American mills, there will be adequate industry capacity, barring further closings.”
Zinc, besides being used as a coating on some steels, appears in appliances in castings. The metal’s prices have approximately halved in a year, from about $1.20 a pound in November 2007 to sixty-one cents a year later.
With slumping demand, mining companies are closing or reducing output from their mines, and planned new mines have become hard sells. Little expansion is likely until demand recovers.