The Outlook For Steel In 2005

Should steel buyers expect the tumultuous market conditions that characterized 2004 to continue into 2005?

Should steel buyers expect the tumultuous market conditions that characterized 2004 to continue into 2005? Although we anticipate some improvement this year, most of last year’s problems persist. In 2004, China helped to create shortages of ferrous scrap, iron ore, taconite, coke, shipping containers and just about everything else needed for steel making, which resulted in price increases for those products. If the pattern continues in 2005, ongoing raw material shortages will create shortages of finished products as well.

We’ve already experienced spot shortages of certain steel grades (for example, leaded steel) caused by a short supply of metallic. It is not inconceivable that shortages of various steel grades, including free-machining grades, will surface again this year. We will have to wait and see what happens.

Part of the reason for the shortages is that U.S. mills, although producing at capacity, cannot keep up with demand. At the same time, European steel has not been available to make up for the shortfall. Early last year, European producers were engaged in rationalization and modernization programs that left them with barely enough steel to satisfy the demand in their own markets.

The dynamics of the U.S. steel industry is significantly impacted by world events. For example, if the cost of oil increases, we will probably see an increase in the cost of diesel fuel costs, which increases transportation costs that may have to be passed along to customers. For that and similar reasons, it’s likely that the industry will see additional price increases this year.

However, price increases will probably not occur as frequently they did last year, although they will be more frequent than the increases the industry experienced during the 6 years prior to 2003. However, they probably won’t be as large because of changes in the industry and in material availability. The fallout is going to affect price.

To ensure that steel buyers will have enough metal to meet their needs, they will need to communicate with suppliers. Give suppliers as much lead time as possible to go out into the marketplace and acquire the raw materials necessary to produce the finished goods needed. Focus on establishing fair and equitable relationships with them where both sides benefit from the relationship. The supplier and customer together should be able to solve all problems.

We have gone through a gut-wrenching period of change in which some 40 U.S. companies involved in steel production and related activities have become bankrupt. We have also gone through significant rationalization of production capacities and consolidations within the industry. The worst is hopefully behind us, as the renewed U.S. production base offers hope for the future.

But problems still need attention, as the industry is fighting for its survival. Our state and federal governments need to understand and support our efforts to compete on a global basis. The problem of trade distortion—steel products made in state-subsidized mills overseas and “dumped” in the United States at below-cost prices—still needs to be solved. The U.S. steel industry is the most modern steel industry in the world. It produces the finest steel at probably the lowest unit costs. But steel makers face an uphill fight competing against subsidized overseas producers and third-world steel producers that enjoy low labor costs and freedom from regulatory restraints.

But optimism within the industry exists. Many U.S. steel producers would not have survived the period from 1999 to 2003 if they hadn’t invested in modernization programs. In the same vein, steel mills throughout the country are taking rifle shots at targets of opportunity instead of using a shotgun approach to improvements. The goal now is to improve our goods and services so that we’ll be able to compete more effectively within the global economy.

To contact Paul Darling at Corey Steel Company, call (708) 735-8000.