Home > Market change > Steel price rise stokes inflation concerns

Steel price rise stokes inflation concerns

January 17, 2011

“The price of steel has risen more than a third in two months, adding to global inflationary pressures as food and energy costs are also soaring. Floods in Queensland have severely disrupted global supplies of coking coal, a major steelmaking ingredient, prompting a scramble among manufacturers to stock up on steel.
That has pushed the price of benchmark US hot-rolled coil steel 37 per cent higher since early November to a two-year high of $783 a tonne, said CRU, a consultancy.

Spot cargoes of coking coal have traded as high as $350 a tonne – up 55 per cent from quarterly contracts agreed at $225 just a few weeks ago. Iron ore, the other major ingredient in steel, is rapidly rising towards record high prices, with benchmark grades delivered to China up 20 per cent since the start of November at $178.30 a tonne.”

Source: Financial Times, January 16 2011

Observations:

  • In the interview on the FT-site Edward Hadas places the coal supply disruptions in Queensland due to weather conditions in the context of global commodity price increases over the past months. Key drivers for the continuing price increase are the increasing demand from China and India; the access to cheap money that fuels the demand; and the general shortage on the supply side, which has temporarily been increased by flooding.
  • Hadas argues that only some 20% of the global commodity trade volumes are affected by the weather conditions. This includes commodities like coffee and tea, for which production is much more susceptible to weather conditions than for mined commodities.

Implications:

  • Although the extreme weather conditions have a definite short term impact on coal and iron ore prices, they will not change the pricing in the long term. However, increased occurence of extreme weather conditions due to climate change will certainly make global commodity markets more volatile.
  • The transition to a quarterly pricing system for iron ore will enable the iron ore miners to rapidly pass on increased costs to the steel makers, further increasing the raw material costs.

©2011 | Wilfred Visser | thebusinessofmining.com

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