Medium-term Prospects for Trends in Steel, Scrap, and Nonferrous Metal Prices

1. In 2003, global production of crude steel broke the "sound barrier" of one billion tons for the first time. To a decisive extent, the expansion of recent years relates to the build up of crude steel production capacity in China, which has more than doubled since 1995. With crude steel production of approximately 220 million tons, China was by far the world's largest producer in 2003. In addition, the country also imported more than 40 million tons of steel. Output in 2004 is likely to be in the region of 250-260 million tons. By 2006, it is conceivable that China's production of crude steel could reach some 290 million tons.

Worldwide, from 2007 to 2010, global capacity for crude steel production is likely to grow to nearly 1.2 billion tons. Pushing this development will primarily be the flourishing markets of Asia. However, their per capita consumption of steel still remains substantially below that of Western Europe. For example, per capita consumption in China is considerably less than half that of Germany. Furthermore, the countries of eastern Central Europe œ and the Czech Republic and Poland in particular œ still have growth potential. A number of non-EU countries in Eastern Europe (e.g. Ukraine) have an unsatisfied demand in the field of high-quality grades of steel as well as own production capacities, which are in need of modernization.

2. Paralleling the expansion of steel production, demand for alloys œ and especially nickel œ has also risen sharply. At the beginning of 2004, this pushed up prices for nickel to extremely high levels (see graph).

With prices per ton topping US$ 18,000, China has curtailed its demand for nickel, switching instead to manganese, which is significantly cheaper. However, the quality of manganese alloy steels does not measure up to that of nickel alloy steels. At least in Western Europe, high-quality, stainless steel is mostly alloyed with nickel.

Price dips during the first half of the year reflect first and foremost the temporary reluctance of China to buy. When China resumed purchasing, prices rose immediately. Currently, however, these have eased back slightly.

3. During the course of massive growth in world crude steel production, demand for coke and iron ore also rose distinctly. Here, however, current extraction capacity has remained unchanged, likewise leading to higher prices.

4. Much of the increase in international capacity relates to electric steel production, which is based almost entirely on steel scrap.

At present, the global share of the electric steel process comes to about 44% of total output; in the US the figure is already 51%, while in Italy, which pioneered the technique, it accounts for nearly two-thirds of production. In Germany, electric steel comprises around a third of total steel production.

Practically the sole alternative to using scrap in the production of electric steel is to employ so-called direct reduced iron, which themselves represent a precursor to steel production. But here, too, capacities are rather limited, even though in the first eight months of 2004, output increased by a good sixth.

5. Growing demand for scrap coupled with a generally stable supply led to a sharp rise in prices within the space of a year.

This year, top prices per ton for the simplest types of steel scrap in Germany and Western Europe significantly exceeded ⁄ 200, up from less than ⁄ 80 at the beginning of 2002. Particularly in 2004, prices recovered following the spring decline, due in part to a build up of inventories among prominent steelmakers and a resurgence of exports to China.

Current prices per ton in the US for futures contracts have shot up as high as US$ 280.

Given the aforementioned shortage of all important raw materials needed for making steel, it is not surprising that the price of steel has gone up sharply in every region of the world.
Worldwide, hot rolled wide strip now costs some US$ 300 more than a year ago.

7. Steel production can be expected to increase still further in the medium term. The predicted expansion to 1.2 billion tons p.a. by the end of the decade can be justified by the potential demand in Asia (especially China and India) but also by the need for renewal in eastern Central Europe. Especially in the infrastructure domain, but also in the automotive industry and construction, an increase in steel consumption there can be expected in the medium term. Average consumption is substantially below the Western European level, though not as low as in Asia.

This year, a slight rise in activity in all of the global economy's important regions will likewise promote increased steel production in the short term, driven above all by demand from the automotive sector, where world output is likely to reach around 60 million vehicles.

8. Price volatility is likely to remain unchecked. We anticipate a long-term continuation in the cyclical pattern of steel and scrap prices. Towards the end of 2004, scrap prices are likely to ease, though not to move down appreciably. In any case, the price will exceed the average level of 2003 by at least ⁄ 70-80 per ton.

9. In the medium term, the supply of scrap will rise as a result of new EU regulations on the disposal of old vehicles. However, this is not likely to take hold for another five or six years. The volume of scrap this adds to the market will only be only slightly greater than the decline in the amount of industrial scrap coming from the countries of eastern Central Europe.

In the Czech Republic, the process of dismantling derelict industrial plant is already largely complete, and in a number of other countries œ with the exception of Poland œ there is no longer all that much left to scavenge either. Countries like Russia and Ukraine still harbour long-term potential as sources of industrial scrap.

10. Moreover, since we also expect to see an increase in the importance and use of the electric steel process (with a higher scrap input), scrap prices in the medium term are likely to move at a level substantially higher than the average attained during the first half of the 1990s.

11. Owing to the relatively stable (and sometimes higher) prices for inputs, the price of steel at the end of the current steel cycle is not likely to fall to the same extent as in earlier cycles. Although we expect prices to ease slightly in 2005, Chinese imports of raw materials will mean that any decline will be minor.

12. In the case of aluminium, price rises will be lower than for steel. To be sure, however, aluminium prices are already significantly above the average level of recent years (and particularly above the levels to which they fell during the 1991-93 recession). Today, the price tag in euros for a ton of aluminium is at least the same amount as was once charged in D-marks, i.e. roughly twice the previous level.

In the medium term, Western European and American carmakers in particular are expected to drive up demand for aluminium. The trend towards lighter-weight vehicles is deemed likely to result in heightened demand for aluminium, with the average aluminium content of an automobile reaching some 120 kg per unit. Compared with the current level (and depending on the model) this represents an increase of between 20 and 40 kg.

13. As for nickel, prices are expected to ease distinctly starting in 2005/06, when smelting capacities now under construction especially in Asia (i.e. Indonesia) are likely to appear on the market.

14. Following a slight dip in spring, the price of copper has undergone a marked increase as well, even edging above the high level attained in the mid 1990s.

2. Conversely, the earnings situation will deteriorate at companies (especially auto parts suppliers and mechanical engineering firms) whose sub-contracting agreements do not contain an automatic price escalation clause for production inputs. Action here is urgently required. Price surcharges reflecting higher materials costs must be able to be implemented at short notice in order to relieve part of the pressure on subcontractor earnings.

Among German aluminium processors, the percentage of companies who have negotiated price escalation clauses in their subcontracting agreements is greater than among iron and steel processors. In the aluminium industry, either the London Metal Exchange (LME) quotation or the price list of Germany's Nonferrous Metals Producers Association (Wirtschaftsvereinigung Metalle), which includes cast alloys, applies.

Without short-term price adjustments, the margins of many automotive parts suppliers in 2004 are likely to contract distinctly.

Author: Dr. Heinz-Jürgen Büchner Economics and Research Department
IKB Deutsche Industriebank AG
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