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Still a steal

Fluctuating steel prices are a volatile construction market indicator

Experts suggest that steel prices will not reach their peak June 2008 levels again.
Experts suggest that steel prices will not reach their peak June 2008 levels again.

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The price of steel has gone up again, but is still a bargain compared to the boom years. The question is: what does this say about the construction industry, and are we any closer to an upturn?

Tracking the price of the world’s most widely used metal is, today, a bit like riding a rollercoaster. One minute, you’re looking up, the next, you’re looking down again. Even more difficult is trying to attribute this fluctuation in steel prices to one cause, particularly given the wide number of influences on the market.

One thing that is clear is that the construction industry, as the biggest procurer, will always have an impact on the metal’s global value, irrespective of raw material prices and global production rates. As such, steel prices continue to be relevant, and fundamental to any discussion about a possible construction upturn.

Looking at the price of steel today, however, it is difficult to determine exactly what is happening in terms of new projects and changes in output. In the boom years it was easy; prices rocketed to a massive US $1,640 per tonne, clearly reflecting a significant peak in demand.

Likewise, as we entered into what soon transpired was a global recession at the end of 2008, the fast-paced fall in prices to a low of US $490 in December 2009 was indicative of a reduced number of projects in the world’s biggest markets. Today’s more volatile market, which saw steel prices shoot up to US $570 per tonne in March before falling to a record low of US $405 in June, is far more complex.

Previously, and with the benefit of hindsight, industry analysts put March’s high figures down to changes in the renegotiation period of iron ore contracts (iron ore being a key ingredient in steel), from once a year to every quarter. This month, with prices rising back up again to US$435 per tonne, the construction sector wants to know if the prices continue to be a superficial reflection of the current construction sector, or whether we are entering an upturn after all.

“It is true that rebar prices – what everyone tracks in this market – have increased by at least US $30 in the last three months,” says Alam Steel’s general manager Vikram Bhatia, “but I think that most of the increases this year have been due to increases in the cost of raw materials as opposed to an increase in demand.

“The fact that iron ore producers have moved to a quarterly contract means that every three months prices are renegotiated, which increases volatility in the market and allows iron ore producers to push through additional price increases. Because of this increase in raw material costs for steel,” he adds, “the large state owned mills have had to increase their finished steel product prices as well.”

When asked if construction has impacted prices at all due to an increase in projects, Bhatia maintains that this has not been a contributing factor. “If anything, I think demand has eased off a bit. I think from the beginning of this year to where we are today, demand for steel from the construction industry has gone down by about 10% at least.”

Accordingly, Bhatia anticipates that prices will continue to oscillate within a range of US $30 to US $50 in the coming months while the raw materials market fluctuates and demand remains low. “There is a constant tug of war between producers, who want to push up the price of steel to cater for increases in raw material prices, and the market, which isn’t really in a position to absorb those higher prices due to a lack of demand,” he says.

In sharp contradiction with Bhatia’s views however, stainless steel supplier Arminox’s general manager, Torben Crebs, believes that steel prices are being directly affected by an increase in construction output. He suggests that wholesalers have begun re-stocking and replacing their old inventories as they have gained more confidence in the construction market.

“We have seen quite a good increase in the number of enquiries coming in as more projects are getting started across the region. Places like Abu Dhabi, Kuwait, Qatar and Saudi Arabia particularly are seeing a big increase in activity.” This increase in demand for steel, he says, combined with a reduction in capacity at the steel mills, has caused demand to exceed supply, and prices to go up.

Al Abbar Stainless Steel’s general manager Eduardo Relampagos agrees with Crebs, believing that demand from the construction sector is increasing. He does say however, that volatile prices have been a reflection of a volatile market, and that demand is only likely to increase in countries such as Oman and Saudi Arabia where projects are really getting off the ground. Even then, he suggests that steel prices will never reach their peak levels of June 2008.

Crebs concurs. “I think that prices will continue to go up until the end of the year when capacity is restored at mills, after which they will stabilise.”

Interestingly, Bhatia points out that even if the number of projects in the Middle East rose, there would also need to be an increase in construction output across larger markets in order to affect the global price of steel.

“I agree that the Saudi and Qatari markets will grow, but it is difficult to say whether this growth will increase the price of steel, which is a global industry, because the Middle East market is small in comparison to the US, Europe and China, and can only have so much influence,” Bhatia points out. “So, even if the Saudi Arabian market is booming, if global steel prices are falling then they will fall in Saudi as well.” There is some good news in there somewhere.

Facts about steel

  • Almost 69% of all scrap steel in North America is recycled each year – more than paper, aluminium, plastic and glass combined.
  • Recycling steel saves enough energy to power approximately 18 million households for a year.
  • The amount of energy needed to produce a ton of steel has reduced by 34% since 1972.

Source: The American Iron and Steel Institute

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