21 Jan 2011
Why Steel Prices Are Increasing?
As we saw in 2010 steel prices are again increasing in 2011. At the end of last year we had seen price increases announced for most product groups (Carbon Steels) of around £50 per tonne. These increases are currently finding their way into the market. This year we are seeing further indications for increases of around £50 per tonne in January / early February with a strong likelihood that this scale of increase will be replicated in March / April. These price increases over the first quarter of 2011 will therefore be in the region of £150 per tonne.
Since April 2010, iron ore prices have been negotiated on a quarterly basis, as opposed to an annual cycle in the past. The new quarterly prices are generally based on the previous quarter’s average spot iron ore price. This has lead to a greater volatility in the market price as outside circumstances, such as natural disasters, are taken into price setting more frequently. The contract iron ore price has increased from a low of £64+ per tonne to around £85 in Q1 2011. However current spot iron ore prices are currently in the region of £114 per tonne. This increase in the spot price will almost certainly be reflected in Q2 contract iron ore prices. To put this in perspective of steel pricing, each tonne of steel uses 1.6 tonnes of iron ore.
The floods in Eastern Australia, a region that supplies 60% of the worlds coking coal, has seen 80% of it’s mines closed whilst others are operating at 60% capacity. This has made the threat of a shortage of coking coal in the next few quarters highly probable. This will push coking coal prices up further. Q1 prices were fixed at £142 (up from £123in the previous quarter) and the latest estimates of the spot price are nearer £190 per tonne. Again in the context of steel pricing, each tonne of steel produced requires 600Kg of coking coal in the manufacturing process. The flood damage is expected to impact production of coking coal in eastern Australia for at least 6 months.
Following the severe winter in Northern Europe and with low arisings, scrap prices have quickly increased over the last 2 months and are now standing at over £316 per tonne. This is an increase of over £101 since the beginning of November 2010. This increase is reflected in the 3 month billet price that has risen to £380 per tonne which was £286 in October 2010.
These increases in commodities have been off set slightly by recent reductions in freight rates, though the net effect is in the region of £7 per tonne of steel.
Mills / Imports
The European markets for Cold Reduced Coil, Pickled & Oiled and Hot Dipped Galvanised are tighter following the fire at the IJmuiden facility forcing Tata Steel to declare force majeure of its supply contracts, Prices are reacting accordingly as the current market prices in Europe are not high enough to attract significant imports, a factor amplified by the weakness of the Euro.
Whilst demand in the UK is expect to be similar to 2010. That said worldwide demand, especially in China and India is expected to be strong, putting further upward pressure on raw material costs and therefore the price of steel. World steel production is expected to reach an all time high in 2011. This reflects the current UK’s position as a steel price taker rather than maker.