Steel pricing “Death Spirals” may have surprising consequences
- For steel buyers, a pricing “death spiral” is positive because they can purchase the steel at a much lower price. However, if the buyer is carrying substantial inventory and/or has placed sizable orders in advance at a high price, the consequence can become a financial calamity.
- For steel mills, a price collapse adds to financial stress, especially when the plummeting price is accompanied by a sizable reduction in the operating rate. However, the price collapse promotes changes in the industry’s “industrial structure” including capacity rationalization.
Pricing “death spirals” accelerate the pace of change. Here’s a past and a forecast example:
- THE PAST. In December 2015, hot-rolled band on the world market on the world market fell to $270 per tonne, FOB the port of export, versus the high of $494 in January of that year. At $270 per tonne, the price was $40 and $75 per tonne below the marginal cost of the median-cost non-Chinese and Chinese steel mill, respectively. It was, by far, the lowest in history relative to the steel mills’ cost. Adding to the mills’ alarm, underlying global steel demand was little changed. Unlike the past, the non-Chinese steel companies were not able to consolidate sufficiently in order to regain “pricing power” – there were far too many sellers on the world market.
The non-Chinese steel mills’ solution to this crisis was twofold: First, file an avalanche of steel trade suits against the Chinese steel mills and others; and, second, convince government policymakers that trade protection was essential if they were to turn in a satisfactory financial performance. What was the consequence? In the fall of 2016, the steel industry entered an “Age of Protectionism.”
- THE FUTURE. A HRB pricing “death spiral” is forecast in China in 2019 when there’s sizable overcapacity for this product. When combined with a reduced operating rate, in part because governmental actions will likely be restraining steel exports, the steel mills’ profits will be plummeting. At that point, WSD expects more of the country’s municipalities and provinces, as well as the Central Government, to assist the companies in their capacity reduction efforts. Governmental funds will be provided for worker re-training. In some cases, steel company debt will be swapped for equity. Short-term steel company bonds will be sold to the public, as was the case in 2016 when perhaps $30 billion was raised to help carry the companies through the trough. Steel plants in city centers will be closed because the land is too valuable to be occupied by poor-performing and highly polluting steel mills – since the land can be exploited for commercial, industrial and residential purposes.
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