By Susan Avery
While rising raw material costs push up steel prices, market watchers suggest buyers not make big purchasing commitments heading into 2017.
“Steel buyers do not want to lock in for more than six months because prices should start coming down in the second quarter of 2017,” says John Anton, Director, Steel Analytics, Pricing & Purchasing, at IHS Markit.
Anton is keeping his eye on two countries where coal used to make steel is produced: Australia where stormy weather can affect prices and China where mines have slowed production by limiting the number of days miners can work.
In November 2016, prices for metallurgical coal in Australia, a big producer, are standing at $300 a ton, essentially tripling since August, Anton tells My Purchasing Center. “Because of higher raw material prices, the cost of making steel has gone way up in Asia and Europe, but not in North America. But since domestic steel mills don’t have to worry about imports from Asia or Europe, they are going to raise prices.”
The question now is, how far will coal prices go up? Anton points to Australia where harsh weather can have an impact on prices. For buyers mitigating risk, it is a factor. “Weather affected coal prices in 2011 and 2008," Anton says. "It could happen again. If it does this year, prices could double.”
“Rising costs for such raw materials as coal and steel scrap have almost always correlated with higher hot rolled coil steel prices, says Lisa Reisman, Founder and Executive Editor of MetalMiner, pointing out that steel mills are announcing hikes.
“Steel prices had been declining since the last week of July,” she tells My Purchasing Center. “Now, they are bottoming out and we are starting to see our first increases stick.”
Earlier this year, steel prices were affected by “import trade cases for hot rolled coil, cold rolled coil and hot tip galvanized which essentially shut off imports to the U.S.,” she says. “Steel mills were able to raise prices because there was nothing to challenge the increases. That is, until China figured out how to reroute material and other countries—Vietnam, Taiwan—took advantage.”
From her vantage point, Reisman explains that with the exception of 2015, there is typically a pattern of increasing prices for steel products through the fourth quarter into the first quarter, often peaking in early February. This year (2016) will follow the trend of rising prices in the fourth quarter, she says.
With the new year comes some uncertainty. One reason: Oil prices. Oil is a good barometer of commodity market health, Reisman says. Oil above $50 a barrel means commodities prices are more bullish. Below $40, they are more bearish. “With President-Elect Donald Trump, we may see a surge in domestic energy production which could lead to lower oil prices,” she says.
“Now, all indicators are that base metals are quite bullish and industrial metals are quite bullish and we expect steel to follow a similar pattern, maybe not as strong or as long, but similar.”
As for steel supply, domestic mills have been good at managing capacity, Reisman says, explaining that they may maintain that market discipline and not reopen lines previously shuttered. Still, a new steelmaker is coming on stream in the U.S. in 2017, Big River Steel, which could have a dampening effect on prices.
Looking out to September 2017, the MetalMiner Annual Metals Outlook, published in October, 2016, shows hot rolled coil steel prices averaging $560/short ton next year if current market fundamentals and trends hold their course. The report also shows cold rolled coil averaging $730; hot dipped galvanized averaging $725 and steel plate averaging $590. MetalMiner, which watches the markets and regularly updates its views, suggests buyers can use these prices as benchmarks in budgeting and planning.
“We tell buyers not to try to beat or time the market,” Reisman says. “A good time to lock in forward is when there’s good momentum behind a price uptick. Now that prices have turned a corner and started to ratchet up, we are not saying to buy forward yet. We are telling buyers to watch the market closely, and although we expect more volatility next year, we are still bullish.”
Kumar Amit, Specialist at The Smart Cube, saw steel prices rise across China, India and Europe in 2016, a result of a surge in raw material (iron ore and coking coal) prices, restocking demand from traders and end users in the U.S. and China, and steady demand growth from key end-user industries such as automobile and construction. In the U.S., after a sharp rise in the first half due to an uptick in imports and an output surge from February to June, steel prices slumped in the third quarter.
The rise in raw material prices took steel producers and consumers by surprise, Amit tells My Purchasing Center.
“However, the situation may improve in the next 2–3 months, as iron ore prices may drop slightly due to an expected improvement in supply and high stocks in China,” he says. “Moreover, removal of sales tax incentives in China will drag demand from the country’s automotive sector, pushing down prices even further.”
As Amit sees it, global construction and the automotive sector will drive growth in demand for steel. “Both U.S. President-Elect Trump and the Indian government’s commitments to improve infrastructure spending may support demand for structural steel,” he says. “In China, steel consumption is expected to remain moderate.”
Still supply should not be a problem for steel buyers, Amit says. However, protectionism measures such as those mandated under U.S., India, and European Union tariff policies may affect product availability in the short term. Meanwhile, leading Chinese giants Baosteel and Wuhan Iron and Steel plan to merge and form China Baowu Iron and Steel Group. The new entity is set to be the second-largest steelmaker globally, with an annual production capacity of 60 million metric tons.
Here are some additional factors that could affect the steel market in 2017, according to The Smart Cube:
For more on the steel market, listen to the My Purchasing Center podcast interview with Mark Seraydarian, an analyst at IBISWorld, 2017 Steel Forecast: Should Procurement Lock in Price Now?
Susan Avery is Editor-in-Chief at My Purchasing Center. She writes articles, blogs and white papers and manages and creates other content for the online procurement and supply management publication. She produces and moderates roundtable discussions, podcasts, webcasts and video interviews. Susan has 30 years experience covering procurement and supply management for Purchasing magazine and Purchasing.com.
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