U.S. Steel Prices Once Again Outstrip the Rest of the Globe

Prices reached a peak in September 2004, and then retreated modestly. Hot-rolled carbon sheet—a benchmark grade of steel—moved from $260 per short ton (st), or $287 per metric tonne (mt), in August 2003 to $756/st, or $833/mt, in September 2004. It is important to note that global prices rose in tandem with U.S. prices, but generally stopped increasing in June. By September, most buyers around the world were paying about $200/mt less than in the United States.

Steel prices started to decline in the fourth quarter of 2004 and continued to drop for the next 12 months. Hot-rolled sheet bottomed out in August 2005 at $435/st, a drop of $319. This decline was actually a bit overdone, so the price rebounded to $500/st the next month and $535/st by October 2005. Global prices also declined across 2005, but at a slower rate. By August, the U.S. premium was down to about $40/mt. But world prices did not bounce back in September and October, again creating a large disparity.

As the market moves through 2006, a premium persists in the United States. Steel prices are rising in international markets, but they are also rising in the United States. Hot-rolled sheet was up to $565/st in May and there are expectations of another $20-40 in increases over the summer. Chinese, Latin American, and European prices have all increased $75-100 per ton since last winter, and show upward momentum. The international increases have not closed the gap, but it has at least narrowed a little.

Our forecast calls for world steel prices to decline, although the timing is hard to pin down. The global price pressure comes from rising demand clashing with a relatively fixed supply of raw materials. World steel consumption grew about 9% in both 2003 and 2004, and another 4% in 2005. The supply of raw materials for making steel has not kept pace. Yet, the high prices and booming demand for ore has encouraged massive investment in the expansion of iron ore mines. The added supply will eventually bring lower steel costs. But when?

Global Insight's forecast assumes that increased ore supply starts to reach the market in early 2007. Normal inventory replenishment brings lower prices for the fourth quarter of 2006, then higher ore availability and ore costs allow prices to continue declining at a measured pace through 2007. If the increase in mine output is delayed, however, then prices will not decline. Thus, there is significant risk that global prices will not fall, and might even climb a bit from current levels. But ore supply will almost certainly be rising by 2008, so it is hard to find a scenario where the price decline would be delayed past then.