Chinese torture for global steel prices

Steel is a critical component of almost all construction projects. Although the market in Dubai is dominated by concrete structures, rebar still accounts for a sizeable portion of the cost of a building. With this is mind it is not surprising that the recent surge in steel prices is affecting projects across the UAE. Construction Week investigates the rise in the price of steel.

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By  Colin Foreman Published  April 3, 2004

Chinese torture for global steel prices|~|steel body.jpg|~|Lupu Bridge, recently completed, in Shanghai is the world’s longest steel arch bridge. The $266 million bridge is 750 m-long and 28.75 m-wide and links the city’s eastern Pudong business district to the downtown Puxi area. |~|Most in the industry would agree that the construction industry in the UAE is currently enjoying a boom period. This has caused the price of all building materials such as cement to rise as demand has now reached unprecedented levels. Materials such as cement and other aggregates are produced locally in the northern emirates and, because most if not all these materials are destined for the local market and not exported, prices tend to be based on local demand. In other words, the price rises for these materials are a direct result of the increased demand in the UAE. On the other hand, materials such as steel, which are not produced locally, have to be imported and are therefore priced internationally depending on global demand. Even if they were produced locally, ore would still have to be imported, and as steel is global commodity, it would be very difficult for a local supplier to keep the cost of steel down for local consumption. Why should a local supplier sell his steel to the local market when he can get a better price for it on the world market? Although there is no doubt that construction in the UAE is booming, the market is not sufficiently large enough to influence global prices. With a population of around 3 million, on a global scale the UAE is smaller that many big cities. Further east, the Chinese construction market is sufficiently large enough to affect global prices, and is also experiencing an unprecedented boom period. With a population of 1.2 billion, the contrast with the UAE is obvious. enormous The demand for steel in China is enormous. “In the UAE people talk about 10 000 tonnes of steel; in China they talk about 100 000s,” says Lance Brown, regional manager, Corus Middle East. “Demand in China is going through the roof, domestic deliveries have gone up 30% and imports have gone up 60% in 2003,” adds Brown. The number of major construction projects in China is quite staggering. All the major cities are developing rapidly. Shanghai is transforming itself into a regional trade hub, while Beijing is gearing up to host the Olympic Games in 2008. Pipeline projects are also planned with BP already operating in the country and Shell is expected to begin work on a pipeline network soon. With 5000-6000 km of pipeline planned this will place further strain on steel supplies. The massive demand from China has affected the price of raw materials. With so much capacity coming online the demand for raw materials is now at record levels. Over the last 12 months China has added 30 million t of steel making capacity. China is currently buying as much scrap as it can for use in its electric arc furnaces. This has created scrap shortages and has reduced production capacities elsewhere. In December 2001, scrap price were $100/t, by January this year they were US $270/t. In addition, there is currently a $95/t surcharge on scrap, which is applied to insulate dealers from future scrap price increases. All the indicators suggest that this extra charge is set to increase in the future. “The attitude is that, if you don’t like it, don’t buy it,” says Brown. Similarly, the price of pig iron has also increased. In December 2001 it was $108/t, in March 2003 it was $196/t and it is now sitting around the $350/t level. Another raw material, iron ore, which the integrated steel producers use, has also risen in price. Again, this is a result of Chinese demand. The surge in demand in China for iron ore has even put a strain on shipping rates as there are not enough ‘cape-sized’ (capable of carrying 100 000 t and more) vessels to deliver all the iron ore to China from the main iron ore producers in Australia and Brazil. “Shipping rates are out of control, they are at an all time high, three times higher than they were in 2002,” says Brown. To make matters worse, China relies on coal fired power stations for 85% of its electricity production, and much of this coal is imported, placing further strain on the availability of ‘cape’ sized vessels and shipping rates. Coking coal, which is used by the major integrated facilities has also risen in price. With half a tonne of coke needed to make one tonne of finished steel it is an important additive. In early 2002 it was $75/t, now it is $400/t. The prices for other additives such as nickel (20% of stainless steel is nickel) have also risen in price. Volatile movements on the rates of exchange have meant that steel producers are not reluctant to offer fixed prices in dollars due to exchange rate uncertainty. The affect of these rising raw material prices on the availability and price of steel has been dramatic. Corus believe that slab will not be available for another 4-5 months. Slab is the basic bulk material that is shipped out by steel mills to local suppliers where it is rolled into finished products. Slab prices were $210/t free on board (FOB) in June 2002; in January 2003 they were $240/t, and in January 2004 they were $ 310/t. They have now risen to $480/t , an almost 50% increase in three months, or a 100% increase in one year. Another steel product, hot rolled coil, has experienced similar rises. Like slab, the extreme shortage of flat products has been reflected in its price. In June 2003 it was $250/t FOB; in January this year it was $400/t FOB, and is now $500/t. The outlook for the future is not bright as many predict prices will continue to rise, as the boom in China shows no sign of slowing down in the near future. The Chinese currency is also greatly undervalued at present and expected to appreciate over the next year, which is likely to lead to more imports, such as steel, being sucked in. This will offer little respite to the physical shortages of raw materials placing upward pressure on prices. Speculation, double ordering and panic buying by steel traders and stockholders are also likely to make the situation even worse. Many mills are now fully booked into late this year 2004, and the lack of shipping capacity is expected to remain a problem well into next year. This will mean that the current situation in the UAE is set to get worse in the short to medium term as prices will continue to move on a daily basis. This does not mean it will remain indefinitely. “China is always unpredictable but there will be end, and when there is a correction it will fall off a cliff, believe you me,” says Brown. ||**||

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