Mendoza School of Business

Steel prices going up, up…

Published: March 27, 2005 / Author: Andrew Tribune

There are two ways to look at the steel business.

If you make it, you’re probably doing all right.

But if you use it to make something else, you’re probably hurting.

That’s the general consensus of most analysts following a huge explosion in the cost of steel.

The price increase has been good news for local steel companies, most notably the I/ N Tek and I/ N Kote steel plants at New Carlisle.

But it also has dramatically cut into the profits of virtually every other area manufacturer that uses steel, such as Whirlpool Corp.

Although steel prices have tapered off somewhat in 2005 compared to the rapid increases seen in 2004, most analysts expect those prices to continue increasing as global demand for steel increases.

“I don’t know exactly the sheer impact” that higher steel prices have locally, said Jeffrey Bergstrand, a finance professor at the University of Notre Dame.

“All I can say is steel is very important.”

Behind the increase
China’s rapidly-growing economy is one of the primary factors behind the steel boom, Bergstrand said.

Because China’s economy is growing at a rate of 8 to 10 percent a year, steel companies around the world are boosting prices to counter soaring demand.

That price hike was exacerbated by firms, primarily suppliers to large manufacturers, which began hoarding steel to avoid paying record-high prices.

The increase happened rapidly. In mid-2003, the price per ton of hot-rolled sheet steel — a good benchmark and the kind of steel the New Carlisle plants work with — was less than $300. By August 2004, hot-rolled sheet had reached $780 per ton.

Although the price has retreated somewhat since then — it was $640 per ton in February — the price is still far above the average price of $358.

China’s booming economy isn’t the only reason steel prices are so high, however.

Bergstrand noted that the relatively weak dollar is keeping the cost of imported steel high while raising foreign demand for U.S.-produced steel.

That means that domestic manufacturers, who often receive steel from U.S. steel firms, now have to pay dramatically more for raw materials.

Ironically, four years ago, domestic steel companies asked for and received steel tariffs because they were worried about foreign competition.

Then, steel companies endured major cutbacks and altered production methods.

Now, the weak dollar is a form of “natural protectionism,” said Bergstrand. And steel companies, now operating leaner and more efficient plants, are enjoying enormous profits.

Local impact
For local steel fabricators, including the I/N Tek and I/N Kote plants in New Carlisle, the booming steel business is keeping them busy.

“Those are world-class facilities,” said David Allen, a spokesman for Ispat Inland, which operates the New Carlisle plants in a joint venture with Japan-based Nippon Steel.

“(That plant is) very much in demand. If there are orders, they tend to fill up faster there first.”

But not everyone is happy with high steel prices.

Take Benton Harbor-based Whirlpool.

Though the company’s fourth-quarter sales rose 8.1 percent, earnings dropped 22 percent because of higher material and transportation costs, the company said.

The company’s material costs might increase another 7 or 8 percent in 2005, Jeff Fettig, Whirlpool’s chairman, president and chief executive said in a conference call in February.

The easiest way to track the impact of rising steel prices is by analyzing company’s quarterly earnings statements.

Although the price increases began in late 2003, it took until the summer of 2004 for most publicly held firms to acknowledge that soaring steel prices had a tangible effect on earnings.

To counter the increase, companies are often implementing price increases. Whirlpool, for example, raised appliance prices 5 to 10 percent.

Most private companies, especially local RV firms, are reluctant to reveal how much of an impact steel prices have had on their products.

Nor are RV companies solely affected by steel prices — rising aluminum, plastic and wood costs have forced mild increases by most RV companies.

But an online poll released in December by industry magazine found that 40 percent believed RV prices were most affected by escalating steel costs.

The survey found that RV manufacturers are among the first to feel the crunch. And while pricing pressures might force companies to try to absorb the costs, ultimately steel price increases get passed on to the consumer.

Some industries, most notably auto suppliers, can’t raise prices because of intense pricing demands by auto manufacturers. Steel increases partially

influenced Robert Bosch Corp.’s decision to eliminate 530 jobs from its St. Joseph plant by May.

Analysts believe the price of steel, which has temporarily cooled off, will only continue to rise as global demand increases.

And that means inflation looms as a giant challenge for manufacturers who can’t totally pass on the rising costs of steel.

“A lot of these producers and manufacturers are taking a hit and seeing decreased profits,” Bergstrand said.

“They can’t push all of those cost increases on.”

In a nutshell
· The price per ton for hot-rolled sheet steel was about $640 per ton in February, slightly less than the record $780 per ton set in August 2004.

· The average price per ton has been about $358 per ton over a 10-year period.

· The high price of steel has helped domestic producers but it has hurt companies that use the steel.

· Experts see no immediate help on the horizon since China is consuming a considerable amount of world steel. At the same time, the low value of the dollar makes foreign steel more expensive for domestic companies and U.S. steel more desirable for foreign firms.


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