The MEPS Global Steel Price has fallen in July for the second consecutive month. Market demand is likely to be flat in the third quarter. The threat of higher iron ore costs, in the July to September period, prompted steel buyers to build up inventories in the second trimester as a hedge against the steelmakers imposing increased selling values for finished products.
Most mills are attempting to operate with low order books. This weak demand is forcing steel prices down as customers have little business to place. In addition, fiscal tightening in much of the western world and China is stifling consumption of steel for infrastructure projects.
The iron ore mining companies misread future steel market demand early in 2010. The housing boom in China was not sustainable. Government spending in most industrialised countries needed to be curtailed. Higher steel prices from increasing input costs were translated into a reduction in the rate of growth in steel production in the second half of this year.
Changing from annual to quarterly iron ore contracts has not provided more stability for the industry. The reduction in steel demand in the third quarter this year is testament to this statement. If local/national governments have limited budgets then higher steel prices, as a result of increased input costs, lead to less demand for the product.
The steel sector needs a period of stability and realistic medium term pricing policies in order to develop the market. Shutting down blastfurnaces for several months and starting them up, only to close them down again, as is likely in Europe and the US this year, is no way to operate an industry successfully.
It should be said that the iron ore and coal mining companies are not entirely to blame for the current difficulties in the steel industry. They were asked to shoulder the cost of investment in new mines required by the Chinese steel mills in the drive to build up their steel industry. However, it would appear that the miners took on the task quite willingly as they saw the potential for substantial profits from the sale of iron ore. With hindsight, the Chinese mills would not have left themselves at the mercy of a few mining companies with the ability to drive coal and ore prices upwards.
Steel will continue to be a growth industry, particularly for the developing and emerging nations. It has very little competition from other materials for use in construction. Price is, however, an important factor. Budgets are set well in advance of the building work. Rapidly rising steel selling values usually lead to cutbacks in the number of projects which go ahead.