PERSPECTIVE: Companies Scramble as Steel Prices Soar

John Wolz

Editor�s Note: The following column is presented by Taiwan-based Fastener World magazine as part of a news column exchange with FIN.

Second quarter prices from China Steel Corp. of Taiwan jumped 20%, the largest gain in the company�s history. Analysts expect the increase to boost China Steel revenue as much as NT$50 billion (US$1.5 billion) in 2004. In recent years the gap between international and domestic steel prices has widened, making the announcement an important index of the Taiwan steel industry. Downstream Taiwan steel firms complain that domestic prices have grown too rapidly and have asked the Taiwan government to intervene. However, the Ministry of Economic Affairs in Taiwan indicated that the increases were �acceptable� and plans no action against China Steel.
Before the hike China Steel prices were NT$6,000 lower than international rates, making the increase �reasonable,� according to the company. Some steel users have accepted the increase, noting that China Steel�s wire rod price increase of NT$2,700 a ton was still below international rates. Other companies have threatened to demonstrate against the government if it fails to intervene.
China Steel increased plate products by NT$3,200 a ton; steel bar and wire rods rose NT$2,700 a ton; hot rolled products gained NT$2,800 a ton; cold rolled products rose NT$2,450 a ton; galvanized steel coil jumped NT$2,300 a ton; electrical steel coil grew NT$1,900 a ton; and hot-dip galvanized steel coil increased NT$2,600 a ton.
In addition, Baoshan Steel Works of China increased Q2 prices an average of NT$1,200 to NT$1,500 per ton.
Strong demand has pushed prices for stainless steel plates, wires and pipes in Taiwan up 30% in the past three months.
U.S. Steel Prices Up Sharply
The price for U.S. hot rolled steel has increased 66% in the past eight months to $482 per ton. The increase has been fueled by market panic over global steel shortages. A recent survey of American steel users found that nine out of 10 steel consumers experienced supplier price increases in January. In addition, 85% of the surveyed firms paying above-quote rates to acquire steel materials. Nearly half of the firms admitted that some orders have been cancelled by the suppliers. And many have boosted inventory to weather further price increases.
Steel Shortage to Continue
A global scrap and coke shortage may force some Taiwan manufacturers to cut production during the third quarter of 2004. Steel makers in Taiwan, Japan and South Korea have already announced reductions in the manufacture of hot rolled and wire rod supplies, further shrinking steel exports. China Steel reduced exports by 10% in 2003 to meet domestic demand, making further export limits unlikely for China Steel, which projects overall production in 2004 to be cut by 3%, or 340,000 tons. But Taiwan steelmaker Yeng Long announced it couldn�t keep up with domestic demand for steel, signaling further price increases later in the year.
Asian countries such as Japan and South Korea have stopped exporting scrap and billets, increasing a raw material shortage in import-dependent Taiwan. Most Japanese steelmakers buy coke from China, but strong domestic demand has forced China to set export volume limits.
Steel Prices Take Toll
The undaunted rise in steel prices has made it impossible for some Taiwan fastener firms to pay for raw material, resulting in a deficit of NT$600 million. Other fastener makers have closed factories because they�ve been unable to pass along increased costs to their customers. The blistering steel market has forced many steel users to pay cash for raw materials, making it difficult for some to stay in business.
China Drives Global Steel Demand
The economy in China has been growing rapidly for the past three years. Although China�s economy is only one-tenth as large as the U.S. economy, China has become the third-largest importer in the world, with a 41% import growth rate during the first nine months of 2003. China is currently the sixth-largest economy in the world, growing an average rate of 8% each year, and the seventh-largest industrialized country. While Asian countries used to rely mainly on the markets of the U.S. or Japan, they now have adjusted to keep pace with economic development of China.
World Steel Dynamics, a steel-industry consulting firm in the U.S., predicts that the global demand for steel, driven by China�s growing consumption, will likely lead to a worldwide steel shortage in 2004. Global steel demand is expected to reach 936 million metric tons this year, with China accounting for 31% of the demand. In 2001 steel production totaled 780 million metric tons, with China consuming 22%.
Rising steel prices have led to significant profits for the steel industry. World Steel reports that the 35 largest steel makers worldwide are anticipating profit gains of 10% in 2004.
Wu Predicts Boost in Taiwan Fastener Business
Taiwan Industrial Fasteners Institute president John Wu noted that numerous European and American buyers are starting to refill their inventory. Such activity is expected to boost Taiwan fastener orders 5% in the first quarter of 2004. While unit prices could go up, Wu warns that a short supply of raw materials should make companies cautious about promising product for new orders. Wu stated that the inability of downstream customers to raise prices has influenced China Steel to ask for smaller price increases. But the rising cost of steel billets � and a subsequent decline in supply � will push prices higher in 2004.
Wu traveled to Japan in October to participate in a fastener association meeting, followed by a trip to Europe to survey local markets. Upon his return to Taiwan, Wu reported that the economic recovery in Europe is progressing, while market demand for screws and nuts remains strong. Screw orders from Europe have increased 5%, while 2004 exports to Europe are expected to grow 5%, and increase 10% to the U.S.
China Cancels Export Tax Refund
China ended its export tax refund program on January 1, 2004. Analysts believe such a change will be favorable for those Taiwan-invested enterprises that are export-oriented, but not those oriented towards local sales in China. State-owned enterprises in China will focus on local markets after losing export advantages, resulting in lower prices that will hinder Taiwan companies that serve local markets.
Ending the government subsidy will force Chinese operations to compete head-to-head with Taiwan enterprises whose products tend to outperform their Chinese counterparts. Ending the refund policy has no direct impact on export-oriented Taiwan enterprises, because most of these companies are located in special economic zones excluded from the refund program. But Chinese companies have benefited from the program, which lowered export costs for them.
China Equals U.S. in Taiwan Exports
For the first time, Taiwan exports to China caught up with U.S. consumption in October, making China and the U.S., apart from Hong Kong, the most important two exporting countries for Taiwan. Taiwan exports to China have been growing rapidly since May 2003, in contrast to slumping export figures to Hong Kong, which saw exports from Taiwan decline 8.7% last year to a total of $23.3 billion in goods. \ �2004 FastenerNews.com