In June, according to data from KeyBanc Capital Markets Inc., Cleveland, cold-rolled steel was $1,277 a ton, and hot-rolled steel was $1,192 a ton. In June 2007, they were $681 a ton and nearly $588 a ton, respectively.
Higher sheet prices have affected every corner of the metals industry, but opinions differ as to what’s behind the price surge. According to KeyBanc’s Arindam Basu, Industrial Group associate, and Eric Klenz, director and head of the Metals Practice, higher demand for steel in emerging economies is driving the costs of raw materials to record highs. This, in turn, is raising the price of sheet.
"The driving factor behind the price increases has been an issue of global demand, led by Asian and other industrializing nations," says Klenz. "Emerging economies are going through a kind of Industrial Revolution, similar to what more mature industrialized economies did a couple hundred years ago. "As that’s occurred, raw material costs have skyrocketed for steel mills in the form of both iron ore and scrap. So, you have that in the face of strong demand for steel products worldwide, although it hasn’t been that strong in the United States this year. But it’s a global market, so that’s allowed the producers to raise prices and pass along raw material costs to their customers."
Nick Sowar, global steel leader at Deloitte & Touche LLP, New York, says demand isn’t driving sheet prices higher. Rather, he points to costs and unusual economic conditions.
"A lot of it has do with where the U.S. dollar is," he says. "So, to the extent that imports are that much more expensive, the domestic producers are in a position to pass along these costs to get a fair margin and not absorb them themselves. And that’s exactly what’s happened here because this [phenomenon] isn’t demand-driven in North America, this isn’t where everybody’s clamoring for more steel--demand is modest. So, there’s almost a perfect storm right now: limited import options for users and unbelievable costs, primarily in energy, scrap and iron ore, that are forcing this along."
The effect on mills
Klenz, Basu and Sowar all say higher prices for sheet have had a positive impact on steel mills. For example, on July 29, U.S. Steel Corp., Pittsburgh, released its 2008 second-quarter results, which showed unprecedented earnings: a net income of $668 million. This compares with a net income of $235 million in the first quarter of 2008 and a net income of $302 million in the second quarter of 2007.
Sowar says vertically integrated mills are in the best position within the sector because they’re the ones that control or have access to their own metallics or ore. These include ArcelorMittal, Luxembourg, and U.S. Steel.
"Most of the North American producers, the integrated steel producers, have access to their own metallics," he says. "That’s enabled them to be in a far better position than, say, a Western European steel company or a Chinese steel company because they’re paying spot prices--they’re paying truly world market price."
John Armstrong, manager of public affairs for U.S. Steel, says that in North America, the company is almost completely self-sufficient for iron ore and can provide about 80 percent of its own coke needs. For other raw materials, U.S. Steel purchases them under contracts.
AK Steel Corp., West Chester, Ohio, is working to become self-sufficient in coke supplies with a proposed SunCoke facility in Middletown, Ohio, says Alan McCoy, vice president of government and public relations. The company has also sought opportunities to secure sources of other raw materials and will continue to do so, especially as it faces nearly certain cost increases.
"We see no end to the scarcity and price escalation of major inputs," says McCoy. "We expect our energy and raw materials to cost more than $1 billion--yes, billion with a ‘b’--more in 2008 than in 2007."
Service centers and the supply chain
Although Klenz says higher sheet prices have had a relatively positive effect on service centers’ earnings, many find themselves walking a thin line between high costs and customers’ needs.
Rising costs have forced service centers to have higher liquidity needs, says Basu, because even though they pass along price increases, they still have higher working capital needs.
"We’re negotiating transaction prices to the best possible outcome, although we have to be careful to pass along the new cost increases so that we continue to generate the liquidity necessary to replace the inventory that we’re selling to the customer with what continues to be continually increasing replacement costs," says Mark Breckheimer, executive vice president of Namasco Corp., Roswell, Ga., and president and CEO of Primary Steel, Roswell, Ga., a subsidiary of Namasco.
Mike Kruse, vice president of marketing at Heidtman Steel Products, Toledo, Ohio, says his company sometimes finds it challenging to balance high costs with customers’ needs but that extra effort on both sides can pay off.
"You want to have enough inventory so that you have ample inventory for changes in people’s schedules, and they do vary--people pull things up quicker and push things back," he says. "But at the same time, as volatile as the market is, you really have to watch and make sure your inventories don’t get out of whack. It’s a tightrope that you have to walk. It makes everyone plan better. Strong communication with your customer is always important. In this type of market, it’s absolutely essential."
Breckheimer says Namasco and Primary Steel have started seeing some material substitutions among their customers--the major instance has been concrete for steel plates in water tanks--and that some projects have been pushed back or canceled because of higher sheet prices. Both companies deal almost exclusively with hot-rolled steel, which is used in construction and equipment manufacturing.
Kruse says Heidtman Steel Products, a distributor of 100 percent flat-rolled steel, hasn’t seen customers substituting for sheet, nor is it aware of any projects that have been pushed back or canceled because of higher costs. There have been rumblings of both phenomena, though, he says.
The importance of relationships
Another organization that hasn’t seen material substitution is the North American Steel Alliance, a member-owned purchasing cooperative that serves the metals distribution industry.
"I don’t think that’s happened yet," says Miles Donovan, vice president of NASA. "It’s one of the things that we really have a unique view on because we get data from our suppliers on a cross-section of roughly 100 members."
Additionally, Donovan says that although higher sheet prices haven’t affected the organization overall, they’ve definitely had an impact on NASA members. In the short term, inventories have been down, and people are being careful with their cash flow, he says.
"The long-term effect is that hopefully we’ll have stronger people in inventory management and purchasing at the distribution level and probably the mill level," says Donovan. "This certainly isn’t to say that they’re not good people now. I just think they’re going to have to be even better in the future."
Lonnie Terry, president and CEO of NASA, says the volatility of today’s market makes it especially critical for companies to draw on the benefits that come from membership in groups such as NASA. In addition to best-practice sharing, Terry says being part of something bigger can help companies with business opportunities.
"When you’re working through a transitional environment, as we are today, it’s as much as having access to product as anything," he says. "A historical relationship with a producer might not be enough in the future. You may need a little more horsepower behind you to generate meaningful interest. I think that’s something the North American Steel Alliance has provided for many of our members, and we are committed to working with our members and suppliers to develop mutually beneficial, long-term commitments."
What the future holds
Both Klenz and Basu say the steel industry is in a strong position, which will likely continue through the next few years. Sowar says he would be surprised to see any major decrease in price and that unless the value of the dollar increases, there won’t be major giveback in prices.
Service centers and mills say they’re not in a position to comment on the outlook for the steel industry and the price of sheet in particular, but Kruse cites another Heidtman Steel Products executive in regard to when the market will stabilize and what it’ll look like when it does.
"I like what one of our vice presidents said when we were asked [about that] in a meeting," he says. "They said, ‘Get your crystal ball out. Where do you think pricing is going to settle out?’ He said, ‘Let me tell you about my crystal ball. It looks more like a bowling ball--it’s dark and has holes in it.’
"We wouldn’t even want to take a stab at where and when things are going to stabilize because we’ve been wrong all year." MM