No end in sight for rising steel costs, claim analysts

While steel production rates continue to rise, raw material supplies will remain tight, and that means higher prices.

Another sizeable jump in iron ore contract prices is anticipated in 2005. Expectations vary, but even the most wary and modest forecast is for a double-digit percentage increase. Some market-watchers believe prices could rise by more than 20 per cent.

Such a massive increase would have immediate repercussions on the prices of cans. According to the Association of Fruit and Vegetable Processing Industries (OEITFL) estimates, this increase in the price of metal packaging would lead to a rise of 5 per cent minimum in the cost prices of canned fruit and vegetables in Europe's supermarkets.

"Prices often increase from year to year, but his year we have seen an increase across the board,"​ OEIFTL secretary general Pascale Keppenne told FoodProductionDaily.com.

"Now we hear that steel prices could be increased by a massive 20 per cent, which would make negotiating buying cans very difficult. Steel makers are clearly preparing to pass on costs to can makers. We are worried."​

Steelmakers dependent on imported iron ore are taking steps to secure future supplies by new long-term agreements. In some cases, mills are buying equity positions in iron mines to guarantee supply.

MEPS believes that iron ore supply could become easier in 2006 or 2007 when some of the mine expansions come on stream. But this does not necessarily mean prices will fall back to their early-2000's levels.

Three companies control 75 per cent of global iron ore supply, and they are unlikely to respond to the present high prices by creating excessive capacity.

In coal and coke, supply conditions are tighter than in iron ore. The global market for hard coking coal was under-supplied in both 2003 and 2004. It is expected to remain in deficit in 2005 and probably in 2006 as well.

Steel producers can therefore expect to pay considerably higher prices - some forecasts are for contract prices to double in 2005, adding an estimated $US35 per tonne to steel production costs.

Other steel making inputs such as alloys have also gone up in price. The cost of ferro-manganese has more than doubled in the last twelve months.

Freight rates for dry bulk cargoes such as ore and coal have retreated from the all-time high that they reached in January this year. Nevertheless, it still costs about $US18 to transport a tonne of iron ore from Brazil to Western Europe: at the start of 2003 the cost was $US8 per tonne.

Ocean freight rates are unlikely to fall back dramatically before 2007 when a significant number of new vessels enter service, providing a growing supply of shipping capacity.

All these production cost increases have come about since the steel price reached its last low point. Mills have been able to pass them on because of the strength of steel demand.

However, when the demand cycle reaches a peak and turns down, buyers cannot expect steel prices to drop back to their previous lows. High input costs will put a floor under steel prices.

MEPS​ says that the days of hot rolled coil at below $US250 per tonne are gone for the foreseeable future, which means steel packaging is set to get more expensive.

Source: MEPS - International Steel Review