Predicting the price of steel

A worker at a steel factory in the Ukrainian industrial city of Mariupol which has played a part in the Eastern European construction boom.

Steel and oil. What do the two have in common? When it comes to cost, the connection between them is too tight for coincidence, but despite this, price predictions remain anybody’s guess.

He who could predict the price of steel, would no doubt be a very rich man. And the reason why the steel industry is not full of very rich men – at least, not all of them – is because few can predict the price of steel.

The factors that affect steel prices in the Middle East weave a complex, interconnected and intricate web. Sliding variables within one factor can affect change in another. One variable may be offset, or magnified, by another, leading to one big headache when trying to predict the price of steel for financial planning or futures-trading purposes.

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The various factors that affect price can be split into four main umbrella terms. The first, the cost of raw materials, is the obvious favourite in the battle for influence, but is by no means the clear winner.

Global, regional and local demand is a second strong contender. As in any industry, the twin-issues of supply and demand must carry out a battle known as the “burden of adjustment,” in a never ending bid to discover an often elusive harmonious balance.

Freight is a third factor. With the dominant suppliers of raw materials being spread across the globe, hawking their wares across international boundaries, much depends upon the geographical location of proprietor and consumer.

Fourth is the single most important and influential factor in the global economy – the price of oil. In fact, a quick glance at corresponding graphs of oil and steel prices over the past seven years is all it takes to reveal that one does indeed drive the other, the similarity between the peaks and troughs being far too striking for coincidence. A closer look at each of these factors reveals the depth of the headache posed when trying to predict the price of steel.

Raw Materials
The two dominant raw materials used in steel production for the construction industry are scrap and iron ore. Put simply, cheaper raw materials equals cheaper steel. For some years, the Middle East industry could depend upon a wealth of scrap, both heavy industrial grade and light, from the industrial wastelands of the Eastern Bloc.

The fall of communism and subsequent end of the Cold War in 1989 led to a period of economic uncertainty in the former Eastern Bloc as nations dragged themselves back to their feet, while the machines of communist heavy industry lay dormant. This led to an influx of cheap scrap metal.

“Scrap used to come in big quantities from Eastern Europe, Russia, Ukraine and all those places where you had a lot of industrial remnants producing a lot of scrap for the rest of the world,” explains Madar Steel CEO Samar Hassan.

However, as the wheels of economic recovery began to turn, fueled by abundant supplies of natural gas, construction began to boom within the former Eastern Block countries, and a need arose for those nations to feed their own appetite.