Steel Shortage=Price Increases - Market Lines
Construction Equipment Distribution magazine is published by the Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada. AED membership also includes equipment manufacturers and industry-service firms. CED magazine has been published continuously since 1920. Associated Equipment Distributors
Home         About Us         Media Kit         Subscribe         Previous Issues         Search Articles         Meet the Staff        AED Homepage

CED Menu

Arrow Home
Arrow About Us
Arrow Media Kit
Arrow Digital Subscription
Arrow Search Articles
Arrow Meet the Staff
Arrow Trade Press Info
Arrow AEDNews



Premium Sponsor:
Infor

SECTION: Market Lines

Questions or feedback?
Contact Kim Phelan at (800) 388-0650 ext. 340.


Steel Shortage=Price Increases

By Frank Manfredi

Article Date: 04-01-2004
Copyright (C) 2004 Associated Equipment Distributors. All Rights Reserved.


That giant sucking sound you hear, followed by a faint clang-clang-clang, isn’t jobs leaving the country, as Ross Perot mistakenly predicted, or service jobs moving to India and Pakistan as the Democratic presidential candidates would have us believe. It’s China sucking up all the spare steel capacity in the world. China is absolutely booming. Last year the economy there grew by more than 9 percent fueled by its government’s desire to become a thoroughly modern country in time for the 2008 Olympics. Construction equipment demand has mushroomed. For example, Daewoo’s plant in Yantai, China, which produces hydraulic excavators and lift trucks, produced and sold 6,116 excavators in China in 2003. What’s more their goal for 2004 is 10,000 units. Daewoo’s experience is typical of the six or seven non-Chinese producers in the country. Total sales of excavators in 2004 could easily exceed 40,000 units. This is a typical example of the demand for all kinds of capital goods in China. Why is this important to North America distributors? Because, since about January 1, a shortage of many types of steel, especially the plate varieties used for construction machinery, has developed that is starting to impact U.S. manufacturers. And I estimate that shortage will result in equipment price increases of between 2 percent and 5 percent this year. That may not sound like much, but in comparison to no increases during the past four years, it’s a lot. If you’ve followed the U.S. steel industry at all, you know that out of 25 or so steel producers here, about 20 are about to be or were recently in bankruptcy. That was a part of the justification the Bush administration used for imposing tariffs of 30 percent on imported steel. The U.S. steel industry has not built a new blast furnace for more than 20 years. Blast furnaces are used to process iron ore into pig iron that is then used to manufacture steel, which is usually composed of several types of metals. All of the new steel production that’s come on stream uses electric furnaces. Electric furnaces are designed to melt scrap steel. No iron ore is necessary. Up until now the situation has worked very well because the United States is one of the largest producers of scrap. Every year we scrap 5 million to 6 million automobiles, as well as steel from demolition projects, manufacturing, etc. But, the electric furnaces are now using up most of our scrap. Demand from China for plate steel started causing shortages last year. China produces steel but not enough to meet its current domestic demand. Most of China’s steel production is also from electric furnaces. The only problem there is that China doesn’t have enough scrap to feed the furnaces. Their citizens are just now entering the automobile age. The country has lots of iron ore, but the mines are in remote areas that are not well served by railroads and highways. China’s demand for scrap has pushed scrap prices on the world market up from approximately $150 per ton to more than $250 per ton plus transportation costs. The situation is great for iron ore producers who have been languishing for years. Iron ore producers shut down a great deal of their capacity due to lack of demand and low prices. Right now there is a worldwide iron ore shortage, which is driving up ore prices. The higher ore prices will drive up demand of mining machinery – but that’s a whole other story. Compounding the problem is a shortage of coke coal. Blast furnaces are fueled with coking coal. A lot of U.S. coke mines have been shut or production reduced because of environmental issues. Foreign coke is available, but is expensive to transport. So, in a short period of time, there is a nexus of events that will have an impact on our industry during the next six to nine months: a scrap shortage, a coke shortage and an iron ore shortage, plus a blast furnace capacity shortage. Most of the larger equipment manufacturers buy steel under long-term supply agreements, so they will be the least affected by these developments, at least for 2004. But when those agreements come up for renewal, the steel companies are likely to want to push through fairly aggressive increases that will have a bigger impact on equipment prices in 2005. Look for manufacturers to increase prices in response to the steel price increases that are sure to come, but I also expect them to use the steel price hikes as cover for raising prices and improving their margins. 2004 is going to be a wild ride — a rising market and rising prices! We haven’t seen a situation like this since the early 1980s.
[ TOP ]