Arcelor raises steel price; Nippon steel faces higher costs

The Business of Mining - thebusinessofmining.com | July 28, 2010 | 9:17 am

“ArcelorMittal, the world’s largest steel maker, said it is going to increase its prices for steel by 10% this year, even as it expects steel demand to weaken throughout most of the world.

‘We need a 10% price increase for spot business in order to replicate our profit level in the second quarter,’ said Chief Executive Lakshmi Mittal.”

Source: Wall Street Journal, July 28, 2010


“Nippon Steel Corp. said Wednesday that a rebound in steel demand, particularly in Asia, pushed it back to the black in its fiscal first quarter, but soaring iron ore and coal costs ate into its profitability and are clouding its earnings recovery prospects. …

Nippon Steel is not alone in contending with high input costs. JFE Steel Corp., Japan’s No. 2 steel maker, on Tuesday also reported its net profit fell 41% from the previous quarter.”

Source: Wall Street Journal, July 28, 2010

Observations:

  • Change in pricing system of iron ore has allowed miners to pass on price increases to steel makers. As many steel makers have fixed prices with customers in medium term contracts, profits are reduced by the increase of raw materials that can not be passed on to customers immediately.
  • Only last month various steel makers warned for steel price reductions because of the threat of overcapacity in the industry. At the same time, warnings for increasing steel price volatility appear to become reality, as long term price contracts are replaced by spot price-based pricing.

Implications:

  • Many competitors of Arcelor Mittal will follow in increasing steel prices. As the construction industry is recovering from the crisis, increasing prices will impact demand heavily, causing output levels to fall and overcapacity to increase further. Therefore, the steel price increase can be expected to be short-lived.
  • Increasing seaborne iron ore prices mainly impact steel makers that are not vertically integrated. Arcelor Mittal is hit less than other Indian producers as they are pursuing upward integration aggressively and are less dependent on seaborne trade from Australia than Nippon Steel and many Chinese companies.

©2010 | Wilfred Visser | thebusinessofmining.com