North American steel
producers heard plenty of frightful economic news as 2008 drew
to a close. Some fear that a stronger U.S. dollar combined with
lower freight rates and lower global steel prices opens the
possibility of more low-priced steel imports heading this
The global financial crisis and tight
credit market helped contribute to weakening demand from most
steel customers, an equation that helped send steel prices down
from a peak of around $1,100 per ton for hot-rolled sheet in
August to around $650 per ton by late November.
Steel producers responded to the demand
sag by quickly moving to cut production, with predictions
pointing to reductions of up to 50 percent of North American
steel capacity by January.
The production cuts, however, led to
some positive signs. Lakshmi N. Mittal, chairman and chief
executive officer of ArcelorMittal SA, Luxembourg, said the
cuts showed the industry was more flexible than it had been in
the past, able to adjust to weakening demand in a matter of
weeks rather than months.
That also led to some good news in
terms of costs of fluxing materials, refractories, electrodes
and other consumables. Lower steel demand means less
production, and less production means fewer purchases of those
"It's not rocket science," said John
Ferriola, chief operating officer of Nucor Corp., Charlotte,
N.C. "The basic laws of supply and demand are still in effect.
When demand for those kinds of things-demand for raw materials
or fluxes or electrodes or other consumables-goes down,
supplies get a little higher."
That happened for steelmakers in the
latter stages of 2008. Several producers found themselves in a
position to cut better pricing deals on electrodes, fluxes and
"Some of these guys are talking to us
now," Keith Busse, chairman and chief executive officer of
Steel Dynamics Inc., Fort Wayne, Ind., said "Even the energy
companies are talking to us. But I think most of those folks
(providers of materials) understand that there is a recession
going on. They've looked at the forecasts and they see where
things are going. People are uncertain because of the economic
crisis and in some cases, because supplies of these things are
a little higher than they were, we're getting a chance to make
some deals at lower prices."
That wasn't the case earlier in the
year, when strong steel demand, together with rising raw
material costs, drove steel prices to their summertime peaks.
Raw materials were in shorter supply, as were consumables,
because most steelmakers were running at close to capacity.
"We don't see an issue with
availability," said James Hrusovsky, president and chief
executive officer of Severstal Columbus, Columbus, Miss.
"Everyone has cut back, and in that environment there is less
need for electrodes and other consumables. My opinion is that
we have not seen the full impact of this (financial crisis)
Ferriola pointed out that about 60 to
65 percent of Nucor's steelmaking costs revolve around the cost
of scrap. Its other costs are move variable, leaving it with a
low percentage of fixed costs compared with what most
integrated mills face.
"The costs of these materials are
variable," he said. "The prices, like with raw materials, are a
function of production. When mills are producing at high levels
the prices for these things go up, and in times like these-when
production is down-the prices come down. We've gotten to the
point where our suppliers are coming to us now and showing a
willingness to work with us on price."