Steel producers are a part of a cyclical business with distinct highs and lows. The principles of supply and demand completely determine the price of this essential commodity. Steel producers raise capacity when demand is strong. When demand falls, most of them suffer huge losses as a result of their large investments.
Current Situation
Steel prices have risen by 20% in the last year. It has prompted steel companies to increase production. The increased demand for manufactured goods has been a huge driver behind the rise in steel prices. Moreover, in the USA the tariffs on imported steel that were imposed by the Trump administration and continued by the Biden administration are also contributing towards higher steel prices.
China, the world’s largest steel producer, has pledged to reduce its steel production output, as part of a pledge to limit the expansion of high-polluting and high-energy-intensity sectors, such as steel, to meet its climate targets. Iron ore imports into China declined by 4.3 % in 2021 compared to the previous year, owing to a production slowdown. China continues to be the world’s largest iron ore consumer, purchasing 1.12 billion tonnes in 2021, compared to 1.17 billion tonnes in 2020.
The Response
In response to growing steel demand, the two largest steel producers in the United States, Nucor Corp. and Cleveland-Cliffs Inc., are looking for a consistent supply of raw material derived from junked automobiles, aged pipes, and industrial waste. In 2021, the 3 largest steel producers in the American steel sector built millions of tonnes of annual output capacity to match the growing demand. By the end of 2024, an additional 10 million tonnes of flat-rolled steel capacity will have been added to the 8 million tonnes that had been added in the previous two years.
In 2020, Steel Dynamics Inc. bought a scrap company in Mexico to help supply a newly completed mill in southwest Texas. As a part of their strategy to increase production capacity, steel companies have invested more than $1 billion on technology that processes steel scrap. The new mills produce steel by melting scrap or processed iron in an electric furnace, which reduces both cost and carbon emissions when compared to iron ore melted in a coal-fired blast furnace. However, this process is putting a lot of pressure on the scrap market. In October, steelmakers’ scrap purchases for 2021 increased by 17% YoY.
As mills continue to use electric furnaces, prime scrap, a manufacturing by-product, will become scarce. Prime scrap is the clean, pure scrap metal left behind after the creation of a specific sort of new product, such as plumbing fixtures, automobiles, or electronics. As a result, prime scrap metal is available in a wide range of shapes, sizes, colors, finishes, quality, and composition. Therefore, Cleveland Cliffs paid $775mn for Ferrous Processing & Trading Co., making it the most expensive scrap processor acquisition in history. This company is the largest supplier of steel to the automobile industry. It has negotiated scrap purchase contracts with those companies to increase its prime scrap supply.
Future of Steel Prices
Coking coal and iron ore are the two most important raw materials used in the production of steel. On the input side, the underlying long-term trend suggests that coking costs may climb further. Global sustainability requirements are stifling investment in both coking coal mines and coke batteries. Investments are falling and are expected to continue to fall. Raw material price increases are likely to be passed on to consumers. Due to increased demand, iron ore prices continue to rise.
On the demand side, enormous infrastructure investments are being made around the world, which will result in an increase in steel demand. The US President signed a $1 trillion infrastructure bill last year.
Long term, increased steel production capacity will eventually play a role in lowering steel prices when demand is matched by additional supply in the market.
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