Steel demand seen strong despite soaring prices Growth largely from emerging markets such as India, China

Print this page Posted on : 06-26-2008 by recycleinme.com

Global demand for steel is helping drive up prices for the alloy and could lead to shortages of raw materials, but the higher prices aren't significantly denting overall demand, steel company executives and analysts said on Tuesday. Industry consolidation is also likely on the horizon, steel experts said at the American Metal Market/World Steel Dynamics conference.

Independent of Price

Despite rising costs for coal, iron ore and energy{ndash}which make up most of the cost of producing steel{ndash}demand for steel is largely independent of price at the moment, said US Steel Corp Chairman and Chief Executive, Mr John Surma.

"That's because there are few cost-competitive alternatives and the price of steel generally makes up a small percentage of the final price of the goods with which it is made," Mr Surma said. "Demand for steel may not be highly sensitive to price fluctuation in the near term," he said , adding that the short-term outlook for the steel industry is good with worldwide steel use expected at six per cent annual growth and hot-rolled coil going for more than $1,000 a tonne.

However, steel demand isn't completely insensitive to price increases, Mr Surma said. For example, substitution might be attractive for the construction industry, or construction may be delayed because of prices.

Emerging markets

The "huge spike in raw materials prices" and other cost drivers such as 15-20 per cent labour inflation in Russia hasn't dampened demand for the alloy, said OAO Severstal Chief Executive, Mr Alexei Mordashov.

"Despite huge price increases we don't see significant damage to steel demand," Mr Mordashov said. "Our customers need steel. We see demand growth everywhere in the world," he added."This growth was largely driven by emerging markets," and that is where the growth likely will continue to come from as more people in India, China and Russia are entering the consumer class. That creates demand for new houses and other goods. "It drives steel demand up," Mr Mordashov said. He expects at least seven per cent annual growth in steel demand from these consuming regions.

Raw material shortage

Mr Lakshmi Mittal, Chief Executive and Chairman of ArcelorMittal, said: "There is supply tightness in the steel market amid this global demand as input costs have also risen." Industrialisation is upping commodities prices and making steel production more expensive, he added.

In Russia, while the production cost is going up, shortages of raw material and scrap could also become issues as the nation's infrastructural needs continue to grow, said Mr Rob Edwards, Managing Director of metals and mining with Renaissance Capital, an emerging markets investment bank. "We've got a ravenous infrastructure buildout," Mr Edwards said, adding, "Demand in Russia has outstripped supply."

Pressure on suppliers

On a global level, demand for steel is putting "unprecedented pressure" on suppliers of raw material inputs, and if demand growth continues at such a rapid pace there could be shortages of resources including the coal used for producing steel, Mr Surma said.

The rising costs and shrinking availability of input resources such as iron ore and energy, as well as environmental constraints and a limited skilled-labour pool, are likely to spur consolidation in the mining industry, said Mr Wim Plaizier, partner with global management consultancy A.T. Kearney. Major steel companies are likely to begin combining mining and metals fabricating businesses under one roof to create "supramajors", Mr Plaizier said.

Consolidation Spree

Globalisation and consolidation trends are "definitely not over yet," Mr Plaizier said.

The larger players are likely to work to increase and ensure their "footprint" in the key Chinese, Indian, West Asian and African economies as well as gain prominence along the "entire value chain" from getting ore out of the ground to selling finished products to customers, Mr Plaizier said. China's steel industry, for example, needs consolidation to make hundreds of smaller companies into a more efficient industry, Mr Mittal said. "I hope we will see more progress toward that consolidation," he said.

Source : Business Line