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Runaway train fueled by steel prices

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It's a seasonal ritual at my house, one that goes something like this About mid-December, dive into the bedroom closet, retrieve a box or two of Christmas bulbs, a tangle of lights and a beat-up tree stand. Then head to the living room, anchor the tree in the stand, breathe deep and steel yourself for the ultimate test ... stringing 10 feet of model-train track together in as perfect and level an ellipse as possible around the base of the newly decorated tree.

That part went well—or as well as could be expected, given uneven floors, cramped space and one rotten house cat. What didn't pan out as planned was the anticipated steady progress of the Chinese-built, diecast metal 0-8-0 locomotive and tender around a metal and plastic loop of Lionel's FastTrack. This year, the Pennsylvania Flyer lived up to its last name and in the space of five minutes flew off the track at least that many times, defying gravity, the relatively steady hand of its remote engineer (me) and the electronic commands issued by the Powermax transformer to which that hand was affixed.

It wasn't the first time the Flyer broke pattern, parted ways with its handler and joined the ranks of the runaways. It was the first time, however, that the locomotive ran away so often in such a short span of time. Who hijacked the train?

If you've bought—or sold—carbon flat-rolled steel in the past four years you may be asking the same question. It hasn't been fun on either side of such transactions, given the whipsawing that U.S. steel mills and their customers have taken—and given—on the pricing front.

It's hardly news that steel is a cyclical industry, one traditionally tied to and driven by physical demand, which in turn pretty much paralleled fluctuations in the broader U.S. economy. Over the years, influences ranging from labor actions to an influx of imports, the proliferation of trade cases and remedies that followed, and deep price discounting by desperate men also played a role in propping up or undercutting industry profitability.

That was then. This is now. Welcome to the age of hyper-cyclicality, where costs rule, cycles are compressed, the stage is global, consolidation has delivered discipline and steel prices soar and sink at relative warp speed.

One of the earliest hints of a sea change in steel pricing dynamics came in 2004, when AMM's archives indicate the monthly average price of Midwest carbon hot-rolled (HR) sheet more than doubled from $18 per hundredweight ($360 per ton) in January to $37.52 per cwt ($750.40 per ton) in September.

Looks like a cycle to me.

The monthly average price of Midwest HR sheet didn't reach the $750-per-ton level again until March 2008, when it hit $39.50 per cwt ($790 per ton) and kept climbing, topping out at $54.44 per cwt ($1,088.80 per ton) in May before falling off the table. And fall it did, like a stone in water. In the fourth quarter of 2008, the monthly average price of Midwest HR sheet plunged from $49.71 per cwt ($994.20 per ton) in September to $29.43 per cwt ($588.60 per ton) in December.

Let's call this one a mega-cycle.

June 2009 saw the Midwest carbon HR sheet price hit a five-and-a-half-year low of $19.39 per cwt ($387.80 per ton) before setting off on a series of mini-spikes and retreats. The most recent of these saw the monthly average price jump from $28.42 per cwt ($568.40 per ton) in October 2010 to $36.63 per cwt ($732.60 per ton) in the first week of January.

A week later, citing "continued escalation in raw materials and strengthening demand," Nucor Corp. announced a $60-per-ton price increase—the sixth consecutive hike for carbon sheet since mid-November, pushing HR sheet prices up to the $800-per-ton ($40-per-cwt) mark.

Say hello to the hyper-cycle.

Opinions on the forces behind the phenomenon vary from being a by-product of globalization, the emergence of China and other developing countries—and their growing appetite for steelmaking raw materials—to the wholesale consolidation of the U.S. steel industry and plain-vanilla capitalism.

But there's no question it's here, and probably to stay. "The mills are pricing as if they are running an industry on a trading floor," one Midwest service center executive lamented in an exchange with AMM. "The supply chain just can't react that quickly."

Hyperbole? Yes, but there's also little question that the dawn of hyper-cyclicality has helped boot the word "speculation" out of the supply chain's working vocabulary. The latest series of cost-driven steel price increases and carpe diem psychology prompted by order books filled through March have spurred forward buying, for sure, but much of the steel actually has a home already lined up and waiting.

The last time the monthly average price for Midwest carbon HR sheet broached the $800-per ton-mark—$790 per ton, to be exact, in March 2008—the steel industry's capacity utilization rate, as measured by the American Iron and Steel Institute, averaged around 88.8 percent. That same measure in the second week of January, when Nucor announced the $60-per-ton increase lifting the price to $800 per ton, stood at 71.8 percent.

Rising raw material costs, particularly for scrap, have definitely helped fire the latest cycle of runaway prices. At the same time, a 17-percentage-point difference in the industry's capacity utilization rate between the $790-per-ton tag paid for HR in March 2008 vs. $800 in January 2011 suggests that rising costs aren't the only factor helping drive up steel prices. Costs may be driving this runaway train, but production discipline is stoking the boiler.

JO ISENBERG-O'LOUGHLIN

EDITOR, STEEL AND FERROUS SCRAP


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Comments

  • Mar 03, 2011

    Excellent point. Production discipline is stoking the boiler when prices are rising at 71.8% capacity utilization. If the economy somewhat recovers and capacity utilization rises to 80%, I dread what the price will be.


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