26 ✦ Iron & Steel Technology A Publication of the Association for Iron & Steel Technology

WSD’s steel experience, steel data-base and availability of steel statis-

tics are the principles for performing steel forecasts, studies and analysis for international clients. WSD seeks

to understand how the “pricing power” of steel companies the world over will be impacted by changes in

the steel industry’s structure.

The views and opinions expressed in this article are solely those of

World Steel Dynamics and not necessarily those of AIST.

WORLDSTEELDYNAMICS

World Steel Dynamics (WSD) is a leading steel information service in Englewood Cliffs, N.J.

Authors

Strategic Insights From WSD

Peter Marcusmanaging partner, World Steel Dynamics pmarcus@worldsteeldynamics. com +1.201.503.0902

Ross Smethillsresearch associate, World Steel Dynamics rsmethills@worldsteeldynamics.com +1.201.503.0910

This report includes forward-looking statements that are based on current expectations about future events and are subject to uncertainties and factors relating to operations and the business environment, all of which are difficult to predict. Although WSD believes that the expectations reflected in its forward-looking statements are reasonable, they can be affected by inaccurate assumptions made or by known or unknown risks and uncertainties, including, among other things, changes in prices, shifts in demand, variations in supply, movements in international currency, developments in technology, actions by governments and/or other factors.

Will 2015 Be a Recovery Year?

In 2015, the steel industry is fore-cast to turn to the Open Road path to the future . WSD expects a number of circumstances to come together in 2015 and the years just following that will work strongly to boost steel mill prof-itability . Among these are:

• An improved growth ratefor global steel demand, even though Chinese steel demand may be expanding at only an anemic pace . The key development will be ris-ing fixed asset investment as a share of GDP outside of China .

• A reduction in global effec-tive steelmaking and roll-ing mill capacity, as many marginal plants will have been closed and/or de-emphasized . WSD believes that about one in seven steel plants located out-side of China can’t “make it” in a low-profit-margin environment .

• Nosustainedmajorspurtinthe prices of iron ore and coking coal because of a con-tinuing oversupply of these products . However, steel scrap price volatility might

be a never-ending prospect for this commodity .

• Widespread actions by steelmills and their customers to hedge the steel price risk . WSD knows of no top management at any steel company that believes in WSD’s prognostication that liquid futures curves will be beneficial to steel mills’ profitability .

Might the return to a “good times” environment for the steel industry be delayed beyond 2015? The answer, of course, is “Why not?” If so, a develop-ment that might dampen the expansion of the global economy could be another financial crisis . Examples of possible financial crises include: the bursting of the U .S . stock market bubble (which WSD thinks is not far-fetched); loss of confidence in the U .S . dollar, which means that it plummets in value (proba-bly not likely, given the vitality of the U .S . economy and the grow-ing supply of low-priced natural gas); and/or a collapse of the Chinese economy (while a siz-able slowdown seems possible, a collapse seems unlikely) .

AIST.org September 2013 ✦ 27

“Musical Chairs” for Price Leaders on the World Market

Unlike steelmakers’ raw material prices that all reside in the same metallics bathtub — i .e ., the price move-ments are typically in step with one another — steel product prices often do not move in sync with one another when considering the price (a) on the world market; (b) in the U .S .; (c) in the eurozone; and (d) in China . The pricing relationships for commodity-grade hot rolled band have often been “out of sync,” especially the past few years .

As of 22 July 2013, SteelBenchmarker™ data indi-cates that the U .S . spot price for hot rolled band (HRB) was US$702 per metric ton ex-works (see page 24), or US$210 per metric ton above the Chinese price at US$492 per metric ton, ex-works . This spread

since 2006 has varied from a low of US$4 per metric ton in June 2009 to a peak of US$523 per metric ton in August and October 2008 . On 22 July 2013, the world export price was US$546 per metric ton and the Western European price was US$588 per metric ton .

Until a few years ago, WSD was segmenting the groups that exported commodity-grade HRB into four tiers . The Tier IV mill category included the lower-product-quality Ukrainian producing mills and some Chinese mills, both of which often had poor delivery records . Tier III mills included average-product-quality producing mills . The Tier II mills included those producing high-quality products, but they tended to not make steady export offerings over

World hot rolled band export price.

Figure 1

“The Snake”

$345Apr 97

----The “V” ----

VolcanoMay 95$475

$255Feb 96

$300Jun 94

Volcanoes and Death SpiralsWorld Hot Rolled Band Export PriceDollars per tonne

Death Valley $185

Dec 98

$333Apr 2000

MassiveEruption

$625Sep-Oct 04

Rock Bottom$175

Dec 01

$353Feb 03

Death Spiral Threat

$250Jun 03

MiniVolcano

MiniVolcano

$390Jul 05

$475Oct 05

$400Dec 05

$610Jun 06

$502Dec 06

$596Mar 07

$550Jul 07

$585Oct 07

$581Nov 07

$280Jul 03

$275Sep 03

$380Mar 09

$620Aug 09

$496Nov 09

The Mighty Lizard$718 Apr 10

TitanicEruption$1,113 Jul 08

$588Jul 10

$772Feb 11

Note: SteelBenchmarker TM prices since 2007

$693Jul 11

$710Aug 11

$623Sep 10

$593Nov 10

$612Nov 11

$655Mar 12

$520Oct 12

MiniVolcano

MiniVolcano

MiniVolcano

Global FinancialCrisis

Death S

piral

Death S

piral

Death Spiral

DE

AT

H S

PIR

AL

VO

LCA

NO

Rawmaterial

pricespikes

$539

$604

Jun 13

Mar 13

Volcanoes and Death SpiralsWorld Hot Rolled Band Export PriceDollars per tonne

Note: SteelBenchmarkerTM prices since 2007

28 ✦ Iron & Steel Technology A Publication of the Association for Iron & Steel Technology

Strategic Insights From WSD

the cycle . The Tier I mills included those making the highest quality products that regularly and reliably offered their product in key export markets . The Japanese steel mills were the best, but not the only, example of the Tier I mills .

In this pre-2008 world, the Tier IV mills’ hot rolled band price might have been offered at a US$40–50 per metric ton discount, FOB the port of export ver-sus the Tier I mills . The Tier III mills were selling at perhaps a US$20 per metric ton discount, and the Tier II mills at a US$10 per metric ton discount .

Since the collapse of the global steel market in the second half of 2008, much has changed . WSD now sees only three tiers of mills when it comes to commodity HRB offerings on the world market . The Tier III mills remain the Ukrainians, whose toler-ances and coil sizes are less desirable than the others,

although they now have a good record for on-time delivery, say WSD’s contacts . These mills may sell their product on the world market at a US$25–30 per metric ton discount from the Tier I mills . The Tier II mill category, which currently includes some of the Russian steel mills, often sells at the next lowest price — perhaps because they are both low cost and highly export dependent, but not because of below-average product quality . They may sell at a US$10–20 per metric ton discount to the Tier I mills . The Tier I mill category now includes many of the steel mills in the world that make the highest quality product .

Since the fall of 2012, there’s been an ongoing shift in which mills are offering hot rolled band at the lowest price on the world market, say WSD’s contacts . Around September 2012, for example, WSD’s feed-back indicates that the Chinese mills had the lowest

HRB spread: U.S. less China (a); world less China (b); U.S. less world (c); and U.S. less Europe (d).

Figure 2

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AIST.org September 2013 ✦ 29

price (taking over from the Russian mills) . Then, after the Chinese and Russian mills raised their price, the Japanese and South Korean mills in a number of cases apparently had the lowest price . Then, a few months ago, the Russian mills took over the low-price prize; but it now appears that the Chinese mills have the low-est price, even though they have boosted their export quote to US$515 from US$505 per tonne, FOB the port of export .

The relative price situation in China, regarding the home price versus the world price, has flip-flopped in

the past decade as hot rolled band in China shifted from undersupply to oversupply . Given the vast num-ber of steel mills in China that are now seeking to sell hot rolled band (about 77 of them), this market is

“competitive” in the academic sense of the word . The Chinese home market ex-works price, notwithstand-ing the recent moderate rally, is now the lowest in the world . ✦