Costs may hurt boom phase

The Weekend Australian - Review - - Steel Spe­cial Re­port -

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.

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