The Rising Influence of Rising Affluence

[DewDiligence]

Steelmakers Pump Up Volume

http://online.wsj.com/article/SB10001424052748703992704576305351560300260.html

›MAY 6, 2011
By ROBERT GUY MATTHEWS

Record amounts of steel are coming to the global market, notably in China, but also in India and South America as producers rush to meet demand that is expected to strengthen this year.

The world-wide effort to boost supply could also keep steel prices, which have risen since last autumn, from surging.

New construction of high-rise urban housing in developing nations, increased automotive output in most parts of the world and increased production of steel-intensive equipment used in the energy and mining sectors are all prompting steelmakers to boost output. "We are forecasting big increases [in production] in China and India, in percentage terms, and in the rest of the world," says Peter Fish, managing director at MEPS International Ltd., a U.K.-based steel consultancy.

China, the world's largest steel producer, recently announced it had produced 6% more steel in the first quarter than a year earlier, setting a new quarterly record, according to government statistics. The world's steelmakers are on track to produce 1.53 billion metric tons of steel, 8% more than the record 1.42 billion metric tons produced in 2010, according to MEPS. China, which accounted for 648 million metric tons of production in 2010, is expected to produce between 690 million and 710 million metric tons this year, most of which will be consumed domestically.

Since 2005, India has seen an average 9% increase in annual production. It is expected to see more as the world's big steelmakers start building plants there to target the local market. "Most of the major global players have India as a growth strategy," says Mike Elliott, an Australia-based mining-and-metals analyst with Ernst & Young.

South Korean steelmaker Posco won clearance from the Indian government last week for a new plant in the country. The world's largest steelmaker, Luxembourg-based ArcelorMittal, is also awaiting approvals to build plants in India. Other steelmakers, including Japan's JFE Steel Corp. and Russia's OAO Severstal are drawing up joint ventures to increase production in India.

Blast furnaces are heating up in the U.S. and parts of Europe as well. In the U.S., steelmakers are reporting full order books through June, which has helped boost plant-capacity-utilization rates to about 78% in April from around 72% in January. Nearly every large, U.S.-based steelmaker, including Nucor Corp., AK Steel and U.S. Steel Corp., expects second-quarter profit to be buoyed by higher sale prices—tied to increases announced in recent months—and increased production at their mills.

Despite the increased supply, steel buyers shouldn't expect prices to fall, but rather for increases to slow. "There is little chance of prices falling back dramatically over the next few years because of the simple reason of increased demand in India and China and the Middle East," said Mr. Fish of MEPS.

Steel prices in the U.S. are between 5%-15% higher than in China and other developing countries but have for the most part hit the ceiling, according to steel analysts. In South America and parts of Asia outside of China, steel prices are still rising, but analysts expect that with more steel coming online, those price gains will moderate somewhat.

Hindering a fall in steel prices is the rising cost of raw materials.

As prices for the main steelmaking ingredient, iron ore, remain high—at around $170 a metric ton, up from about $160 a ton a year ago—steelmakers such as AK Steel Corp. have implemented "cost escalators" in contracts with customers that allow for steel prices to rise in tandem with increases in raw-material costs.

At Crown Equipment Corp., a global manufacturer of pallet trucks and other lifting vehicles, steel purchases have increased as the business continues to strengthen, said Dave Besser, senior vice president of manufacturing. Mr. Besser, who is based out of the company's Ohio office, said he is starting to see prices for sheet steel begin to fall. Mr. Besser says that 90% of his steel purchases are for sheet steel, the type auto makers use. Prices for sheet steel have softened, he theorizes, because some auto plants have had to cut back production because of parts shortages following the earthquake in Japan.

"We have seen steel prices go up significantly since last fall, but just this week we have seen in the sheet market a slight decrease. I don't know if it is a blip or a long-term change."

"Our purchases have gone up and our business is very strong now," he said, "but it is still very difficult to pass price increases along to our customers."‹