Steel prices on the move

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As the world economy staggers from crisis to crisis, any shred of good news is very welcome. This week, shares in US steel firms have bounced – only modestly – but some analysts are suggesting that this could herald the beginning of a recovery in the world’s largest economy. Thursday steel shares in the US were up between 4% and 8% and Rio Tinto’s Finance Director told a Singapore conference that the crash in metal prices may have nearly run its course.
   

Meanwhile in Asia, prices also rallied slightly. Reuters reported that Chinese spot prices edged up by 1% after falling steadily for the last six weeks or so. But there are still concerns that China, which has raised output over the last two months, could take the wind out of any rebound.
   

Steel prices are an important indicator for shipping. On the one hand, they are a key measure for shipbuilders who are facing a drastic drop in new orders and a major struggle to hold on to existing contracts. On the other hand, steel prices are an important gauge of economic activity, and steel demand has a direct impact on shipping’s dry bulk market in the form of demand for iron ore, the single most important bulk commodity shipped by sea. 
   

In a recent report, shipbuilding consultant Worldyards noted that steel prices are a part of variable shipbuilding construction costs and are therefore an important reference point for shipbuilders and shipowners alike. But the dynamics of the effect that steel prices have on the newbuilding market and shipbuilders’ profitability are still only partially understood. 
   

In 2007 and 2008, plate prices slipped slightly, Worldyards says, while newbuilding prices climbed to unprecedented levels. But “shipbuilding prices had their revenge,” the analysts say, “as there was not enough plate to feed the markets. On the way up to more than $1,300 a tonne, it tore a painful but unexpected hole in the shipbuilders’ P&Ls.”
   

Worldyards notes a general convergence in plate prices on the way up but, it says, they behave very differently on the way down. Japanese prices in February were still at around $1,400 a tonne while South Korean prices had fallen somewhat to about $1,000. But it was in China where prices fell most dramatically, down to about $600 a tonne. 
   

The variance in prices, Worldyards suggests, is a result of production growth and therefore potential overcapacity in the respective countries. The Japanese market is perhaps the most controlled – “they never expanded to the extent of the Chinese.” Worldyards quotes reports that Chinese steel production in 2008 soared by a staggering 62% to more than 20m tonnes, and this despite a slowing trend since November. But Chinese mills have not been the only ones to raise production. There has also been substantial expansion in South Korea “though not enough to meet national demand (yet).”
   

Worldyards estimates that there are no fewer than 27 Chinese mills producing plate. And there is a big variation in quality. “We understand that is some cases, shipowners at South Korean yards are insisting on visiting Chinese mills to verify quality standards,” it comments. 
   

Financial problems at shipyards facing soaring steel prices may have been alleviated to some extent by softening prices in recent weeks. But the resulting impact for builders in different locations could vary significantly. The Chinese strategy to revitalise ten key industries – steel included – could be important. And Worldyards suggests that steel prices are unlikely to stay down for long. 
   

“Input costs will need to go up in the long run,” it says, “albeit modestly.” And exchange rates will also have an impact. Worldyards expects the Chinese currency to strengthen, which will have the effect of evening out some of the competitiveness of the Chinese steel mills in the long run.