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Steel is a major input in the construction, shipbuilding, automobile and oil industries. Although the U.S. and Western Europe were largely responsible for the initial development of this industry, since about 1970, China has become a major force in the steel industry. Chinese steel production has grown from 13% of world steel production in 1995 to 32% in 2005. However, China's demand for steel has grown just as fast, and it remains a net importer of steel.
The cost to produce steel varies from country to country, largely with the cost of raw materials, as well as labor and energy. Russia, India, Ukraine, Brazil are able to produce steel at the lowest cost because of a combination of cheap energy and labor. The US's costs are roughly middle of the road. Unlike many other commodities, China is not the lowest-cost steel producer. Chinese labor is cheap, but energy in China is still pricey. As a result, China produces steel at a cost 20% below that in the US, but energy costs in China are higher than they are in Russia, India, Ukraine, and Brazil.
Economic growth across the globe in 2007 and early 2008 spurred a rise in construction activity - steel prices rose. As the 2008 Financial Crisis worsened in late 2008 and early 2009, global demand for steel fell while new steel production capacity was coming into the market - steel prices fell. On May 18, 2009, global steel prices fell to a six-year low.
It should be noted that the majority of steel is utilized by a fairly limited number of purposes. For example, in the United States eight industries consume over 90 percent of the steel used. In North America 2/3 of steel fabricated for consumption is recycled from previous uses.
Steel prices can be quite volatile, moving plus or minus 30% or so through the steel cycle. A typical steel cycle lasts approximately 2-3 years (peak to peak) and this volatility adds significant risk to a steelmaker's revenue stream.
Steel Futures contracts are traded on the New York Mercantile Exchange under ticker symbol HR and are delivered every month of the year. (For more information on commodity tickers, check out the commodity ticker construction page.)
Graph to come.
US Steel, Nucor, and Steel Dynamics are the largest American steel producers. When prices rise, they make more money on every ton of steel they sell. US Steel benefits more from rising steel prices than Nucor and Steel Dynamics, however. Nucor and Steel Dynamics' pricing strategy is to sign adjustable-rate contracts, where the price they are paid varies with the price of inputs such as scrap steel. This means their profits are reliable when prices fall, but means they have less upside when prices rise.
US steel is far more exposed to steel prices than Nucor and Steel Dyanmics. Nucor and Steel Dynamics' strategy has been to lock in spreads in long-term contracts with customers -- the companies pass along increases in raw material costs to their customers, but have limited upside when steel prices rise. Smaller steel producers, such as AK Steel Holding (AKS), Commercial Metals Company (CMC), and Carpenter Technology (CRS), are also beneficiaries of rising prices, although obviously in proportion to their relatively smaller market share.
Steel companies aren't the only parties that benefit from higher steel prices. The companies that provide them with steelmaking raw materials, such as the major iron ore supplier Cleveland-Cliffs (CLF), enjoy the rise in profits as well. Similarly, companies like Harsco (HSC) that provide the steel industry with mill services benefit as well.
Finally, steel traders tend to work off margins of a few percentage points of the selling price of steel. This means that steel trading firms such as Balli Group, Duferco, Stemcor and Salzgitter tend also to benefit from rising steel prices.
|Rank||Company||Country||Steel output (mt)||% of world production|
Top 10 Steel Producers in year 2007
|Shanghai Baosteel Group Corporation||(China)||28.6|
|LiaoNing An-Ben Iron and Steel Group||(China)||23.6|
|HeBei Tangshan Iron & Steel Group||(China)||22.8|
|United States Steel Corporation||(United States)||21.5|