Costs may hurt boom phase
that level from around $ US3000. This is what Laplace Conseil call the ‘‘ industrial phase’’ of economies. By 2010, more than 2 billion people in Asia will be in this so- called industrial phase. By 2020, more than half China’s expected population of 1.45 billion people, are likely to be still below the $ US13,000 level at which the intensity of steel consumption starts declining.
The Australian Bureau of Agriculture and Resource Economics is expecting China’s steel consumption to grow at around 8 per cent a year out to 2012, while in India consumption is expected to rise by 9 per cent a year. In contrast, steel consumption in the US, Europe and Japan is expected to stay flat as steel intensive manufacturing increasingly moves offshore to lower cost countries in Asia and South America.
The boom in steel consumption was mirrored in prices, with average Japanese export prices rising more than 80 per cent from $ US320 a tonne to $ US587 a tonne between 2003 and 2005. But the production response in China and elsewhere has been quick and since peaking at around $ US640 a tonne in mid- 2005, prices have flattened out and are being sustained in a still lucrative $ US500-$ US600 a tonne. And with global production and consumption forecast to be largely in balance out to at least 2012, the outlook is for continued robust prices, though the sector remains vulnerable to overproduction.
The biggest challenge now facing the global steel industry isn’t overcapacity but rising costs. Previous under- investment by the mining industry has led to tight markets for key steel making inputs, iron ore and coking coal. And in the last three years the small number of companies that dominate global mining, such as giants BHP Billiton, CVRD and Rio Tinto, have been able to use their market power to extract huge price increases from the steel mills. In the past five years iron ore prices have risen by 140 per cent.
And there appears to be no let- up in the near term with miners expected to gain at least a further 10 per cent rise in annual iron ore prices once price negotiations start in September.
Consolidation in the steel sector may be far off from matching the market power of the miners, but global steel companies are increasingly offering long- term supply contracts to smaller miners to support new projects, and are even prepared to invest directly in mining projects.
In Australia OneSteel is partially insulated from rising raw material costs by its own growing iron ore production in South Australia. BlueScope meantime is pushing its business into downstream manufacturing in Asia to capitalise on rising Asian demand.