January 26, 2012

FEATURE | Steel

Future unclear for price of iron ore, scrap steel, rebar

IAN HARVEY

correspondent

Steel prices seem to be edging upward but whether they’ll keep sustaining this trend is anyone’s guess, say industry experts.

Scrap steel jumped on Jan. 1 and economists and buyers alike are closely watching demand in Asia for a sign of where they could end up, but as John G. Brasil, President and COO of Etobicoke Iron Works notes: “It’s crazy.”

There are many variable buyers working in the dark and trying to bid on jobs or give customers a price for other than short demand, he said.

“It is a bit of a nightmare,” said Brasil noting that with so many variables affecting both supply and demand, if any one of those factors changes, so too does the pricing algorithm.

If demand in China falters, prices might soften but if United States demand suddenly picks up, all bets are off.

“The pressure is upwards but we don’t know for how long,” he said.

Bob House, the Canadian based analyst for global metal market watcher MEPS International, however, says the overall picture is probably flat.

“The increases won’t be substantial and scrap prices have gone up but they’ve being going up and down like a toilet seat,” he said, noting the slightest nudge drives prices. “If Turkey is in the market for scrap, prices go up.”

Iron ore, on the other hand has been controlled by a small group of suppliers which has resulted in cartel-like pricing.

He’s sympathetic with end buyers and especially those in construction trying to estimate price over the long term for structure steel and rebar.

“It’s hard for them, almost impossible,” he said.

The first indicator is that iron ore prices seem to be trading in a narrow range. World spot ore prices are reported at between US$150 and US $160 a tonne (iron ore fines of 62 per cent iron content) down from US$168 a tonne last year and down from the US$200 a tonne high during the spike caused by a super heated commodities market in 2008-09.

Scrap fetched US$700 a tonne in the same period before falling to less than half that and has climbed slightly to around US$400. Rebar prices hit US$1,041 during the spike then fell to about US$600 a tonne in North America and have drifted upwards over the last year.

Sam Costa president of C&T Steel, a rebar supplier, said the uncertainty is putting pressure on the construction industry. Between the volatility of the U.S. dollar (many transactions are in U.S. dollars) and steel itself, he said, it’s been hard to predict pricing.

“When the U.S. dollar goes down, steel goes up,” he said. “Our concern is also what happens if the sleeping giant in the U.S. wakes up and commodity price go through the roof again.”

He said rebar prices are driven by scrap steel prices but with only short term pricing assured, projecting what a 40 storey building might cost can be a shot in the dark.

“You may not get to the site with rebar for another 18 months,” he said. “And what will be the cost of steel then. The crystal ball’s a little fogged up.”

The shock of the super-heated commodities market three years ago has prompted many changes in the industry, says University of Toronto Professor Peter Warrian whose work focuses on the steel industry.

“For one there’s no long term contracts, it’s more immediate in that the prices are quarterly,” he said.

“But that’s a two-edged sword because while it mean prices increases are felt immediately, so too are price reductions.”

He said the spike in commodity prices has been blamed on a surge in demand from Asia, especially China. However, he thinks the real issue was a drop in supply when steel mills shut down and production faltered in the 1990s which showed up as a short supply a decade or so later.

As for 2012’s pricing outlook, he says, it’s a big question mark. There’s upward pressure on prices but whether it can sustain is dependent on how the world economy recovers or if it slides back into recession.

“I think it’s going to be slow and rocky for 2012,” he said.

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