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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 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.^[1]

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.^[2] In North America 2/3 of steel fabricated for consumption is recycled from previous uses.^[3]

Prices, Tickers, and Delivery Dates

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.

What Impacts Steel Prices?

How US steel makers are impacted by a $20 / ton increase in steel prices. Nucor and Dynergy's contracts with customers that fix their margins mean they are less exposed to price fluctuations than US Steel is.

China represents nearly a third of global steel consumption

China represents nearly a third of global steel production

• Economic growth in general drives greater production and construction, activities that consume steel.As the global economy began slowing down in 2008, steel prices fell by almost 50% in the six months after July, after having nearly doubled in the six months before.

• New construction: Twenty percent of steel is used in construction. As a result, a key metric to watch to forecast future steel prices is property vacancy rates -- higher vacancy rates leads to less construction and lower demand for steel.

• Foreign demand: China's prodigious consumption has made it a net importer of steel. Fifty percent of China's GDP is spent on fixed-asset production -- things like roads, railways, bridges, and buildings -- compared to only 17% for the United States.^[4] However, China's increasing self-sufficiency could displace imports and lead to price drops.^[5]

• Capacity: Increased capacity to produce steel signals lower prices in the future. As a result, capital spending by steel producers is often used as a harbinger of future steel prices - more capital spending today suggests more factories, more capacity and therefore lower prices in the future. Consolidation (steel companies buying each other or going out of business) suggests steel will become less plentiful and therefore more expensive. From the 70s to the turn of the century, production capacity rose at an annual rate of .6%.^[6]Then, both undergoing and expecting rapid growth, steel companies increased capacity at more than 7% per year. As demand and demand forecasts began to fall in 2008 and Q1 09, the world was left with 300-400 million metric tonnes of unused capacity.^[7]

Companies that benefit from rising steel prices

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 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.

Companies that benefit from falling steel prices

• General Motors, Ford, Toyota, Nissan, Daimler-Chrysler, Volkswagen, Harley-Davidson and other Auto Makers benefit from falling steel prices, as it is major cost in the production of cars, trucks, and motorcycles. 20% of US steel production goes to the automotive industry, and ~65% of the weight of a car is steel.

• Shipping companies must purchase new ships to replace those reaching retirement. For many shipping companies, like Diana Shipping (DSX), DryShips (DRYS), Eagle Bulk Shipping (EGLE), and Genco Shipping (GNK), acquiring and constructing new ships is the only way to grow.

• Construction companies engaged in industrial and infrastructure projects require steel as a key building material. These companies include KBR, Inc., Fluor, Granite Construction, and other large and small firms. Certain real estate investment trusts that purchase and develop properties for re-sale, like Boston Properties, HRPT, and Colonial Properties Trust could also benefit as lower materials costs in construction increase profit margins when the properties are sold.

Top 10 Steel Producers in year 2007