Steel is one of the most important metals used worldwide in the construction and engineering industries. This guide will explain what steel is, what drives its price, and what experts have to say about this ubiquitous metal.
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Why is Steel Valuable?
Steel is an alloy made up mostly of iron and containing smaller amounts of carbon, manganese, silicon, phosphorus, sulfur and oxygen.
Its relatively low cost and strong physical properties make steel a popular choice for fabricating a wide variety of items. Consumer durables such as refrigerators and washing machines use steel, as do items ranging from cargo ships to buildings to surgical equipment.
How is Steel Produced?
Steel production takes place in furnaces using the following three different methods.
Blast Furnace – Basic Oxygen Furnace (BF – BOF)
This method uses iron ore, coal, and some recycled steel. Iron ores are reduced to iron and then converted to steel in blast furnaces. Steelmakers cast and roll the steel and deliver it as coils, plates, sections or bars. The BF – BOF method accounts for about 75% of global steel production.
Electric Arc Furnace (EAF)
This method uses mostly recycled steel and electricity, but sometimes other sources of metallic iron. Electricity melts recycled steel in EAFs, which account for about 25% of global steel production.
Open Hearth Furnace (OHF)
This energy-intensive and environmentally unfriendly method accounts for less than 0.5% of global steel production.
Global steel production exceeds 1,600 million metric tons annually. Production is global, but it has shifted dramatically over the past decades from Western countries to China. Chinese producers now account for almost half of the global supply of steel.
Top Steel Producing Countries
|Rank||Flag||Country||Millions of Tonnes Produced per Year|
|#4||United States of America||78.5|
Main Uses of Steel
Demand for steel has climbed steadily over the past few decades as emerging market economies developed larger infrastructure needs. China uses 45% of annual steel production, while other Asian nations use nearly 17%.
The EU accounts for a little over 10% of annual steel demand, and NAFTA countries comprise close to 9%.
The following industries comprise most of the demand for steel:
|Uses of Steel||Description|
|Construction and Infrastructure||Builders and engineers use steel to construct high-rise buildings, industrial sheds, residential buildings, bridges, parking garages, rail lines and other structures. Construction and infrastructure account for about half of the annual steel consumption globally.|
|Mechanical Equipment and Automotive Sector||Steel sheets are used in vehicle frames, hoods, doors, mufflers, bumpers and fuel tanks. Specialty steel is used in engine parts, transmissions, and suspensions. These sectors account for about 30% of annual steel demand.|
|Metal Products||This sector includes consumer goods such as refrigerators, washing machines, and air conditioners and accounts for about 11% of annual steel demand.|
|Other Transport||This sector includes shipbuilding and trains and comprises 5% of annual global steel demand.|
|Electrical Equipment||This sector comprises about 3% of global steel demand and includes connector and component brackets and other equipment.|
|Domestic Appliances||Knives, cookware and other small kitchen appliances use steel. This sector accounts for about 2% of annual demand. |
What Drives the Price of Steel?
Diverse industries all over the world use steel in their products. Therefore, the price of steel is a good barometer for global economic strength. The following five areas represent important specific determinants of steel prices:
- Chinese Economy
- Global Infrastructure Demand
- Transportation Demand
- Input Prices
- Substitution Costs
China uses about half of the annual global supply of steel and, therefore, may be the biggest determinant of steel prices.
Double-digit growth in Chinese GDP over the past decade has created robust demand for steel in office buildings, residential housing, infrastructure and other types of construction.
However, China is also a major exporter of steel. As its growth trajectory has slowed, Chinese demand for steel has waned. Chinese producers have flooded international markets with cheap steel exports and depressed prices.
Ultimately, strong internal Chinese demand generally creates higher steel prices, while weak demand leads to oversupply on the global markets and lower prices.
Global Infrastructure Demand
Construction and infrastructure represent a very large percentage of steel demand. Mature economies including the United States is planning large-scale infrastructure projects to replace crumbling bridges, airports and transportation systems.
The demand for such large-scale projects in major Western economies can drive steel prices higher.
Demand for ships, trains, and cars impacts the price of steel. When the global economy is strong, the need for ships to transport cargo grows. Similarly, a strong global economy creates increased consumer demand for automobiles.
Ultimately, the transportation sector is a very reliable barometer for the overall economy, so economic strength helps the price of steel, while economic weakness depresses it.
Scrap metal and iron ore are the two main materials used to produce steel. Emerging economies China, Brazil and India provide much of the global supply of these materials, and they also have large-scale steel production industries.
The global availability and cost of these materials may depend on the size of the domestic demand from these countries.
Energy costs are another important input cost of making steel since the heat needed to melt iron ore is significant.
Advances in technology have produced strong composite materials that compete with steel. Carbon fiber reinforced polymers, for example, have properties including strong strength-to-weight ratios that make them suitable substitutes for steel in many applications.
Further improvements in composite technologies could lessen demand for steel.
What Do the Experts Think About Steel?
Industry experts are divided about the prospects for steel prices over the coming years.
A report by Visiongain states that oversupply of steel will impact the market for the next decade. The report cites resistance by China to cut production levels combined with declining demand from the rest of the world.
Lourenco Goncalves, Mining Company CEO
A leading mining company concurs with this view:
China (has not been unfairly targeted). They are the perpetrator, they are the problem and they had a chance to discuss this within the OECD (Organization for Economic Co-operation and Development) and they elected not to participate…China has been walking away from a negotiated deal.Lourenco Goncalves, chairman and CEO of Cleveland-Cliffs Inc.
Merrill Lynch Research Report
Other experts, however, see reasons to be bullish on steel:
A Merrill Lynch research report cites three positive catalysts in China that should contribute to higher steel prices:
- A shutdown of illegal furnace operations that contribute to excess supply
- A restocking of low inventories
- Renewed growth in infrastructure spending.
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