Steel Prices, Costs and Capacity Utilisation
Steel and raw material prices
Since about 2005 the key issue in the steel industry has become the availability and price of raw materials - iron ore, coking coal and scrap.
Demand from China drove the markets for iron ore and coal into tightness and the highly concentrated structure of the internationally traded markets for both products enabled prices to be raised to high levels, transferring profits from steelmakers to raw materials suppliers in the short term.
Because of steel's strong position in its applications, those price increases could generally be passed on to customers after some time lag, so that the steel producers restored or even increased their profitability without losing volume to other materials.
This is illustrated in the chart . This shows our data for the price of the benchmark steel product, hot-rolled coil (blue line on the right-hand scale in $ per tonne), our estimate of the world average total cost of production for HR coil (red line on the right-hand scale in $ per tonne) and the estimated utilisation of world capacity for the production of crude steel (green line on the left-hand scale in %).
The chart shows that the trend of prices follows the trend of production costs, such that prices have risen in line with the costs of production in the high-cost period since 2005. It also shows that in the short term the price moves around the trend in response to levels of capacity utilisation, which are themselves driven by short-term changes in steel consumption. A period of sustained high capacity utilisation in the industry from 2005 eventually caused an extreme tightness in the market for steel and the price spike of 2008. The severe economic downturn in 2009 brought capacity utilisation and prices down to much lower levels. Since 2012 prices have moved closely in line with average production costs. Production costs themselves have become more variable over the short term as the pricing of raw materials has moved from an annual to a quarterly or shorter basis, with much greater influence of spot market conditions on those prices.
Steel scrap is extensively traded between countries, the main flows being from the USA and northern Europe to southern Europe and the Far East. China has only a relatively small proportion of its steel produced from scrap in the electric steel sector, but its demand for scrap has been an important factor in tightening the international scrap market. It is likely that China will increase the proportion of production from electric steel as the country's availability of domestic scrap increases. If the growth of that sector is out of step with the development of domestic scrap supply, the demand for imported scrap could from time to time disrupt the international scrap market.
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