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Must-read overview: Can steel companies strengthen your portfolio?

Part 10
Must-read overview: Can steel companies strengthen your portfolio? (Part 10 of 13)

The 2 most important drivers of the global steel trade

Key factors driving the global steel trade

Steel is a global commodity. But its price varies across countries. This price difference leads to international trade. The following factors are important for this trade.

steel over capacityEnlarge Graph

Overcapacity in global markets

The overcapacity in the steel industry is a global phenomenon and it’s not limited to the U.S. The global capacity utilization rate of 78.5% in May 2014, as per the World Steel Organization, is similar to the U.S. reading.

If we look at the table above, the U.S. turns out to be the only country with production deficits. All other major countries have a production surplus and are net exporters. The difference between U.S. and global steel prices remains a key reason for this trend. The overcapacity and the resulting exports from low-cost countries increase the steel supply in international markets. Increasing supply puts downward pressure on steel prices. This is negative for investors in Arcelor Mittal ADR (MT), United States Steel Corporation (X), Nucor Corporation (NUE), Reliance Steel & Aluminum (RS), and the SPDR S&P metals and mining index (XME).

Transportation costs: A key driver for international trade

Steel falls under the dry bulk category. Transportation costs are high. So the difference between domestic and international prices should be substantial for trade to be profitable.

The Baltic Dry Index is an indicator that measures the costs of transporting goods like steel. Steel-exporting countries like China import a lot of iron ore and coal for steelmaking. Increases in shipping costs raise the costs of producing steel. They also increase the landing cost of Chinese steel for foreign importers. As the cost of production rises, Chinese producers have to increase their selling prices. Higher Chinese steel prices make imports from China less attractive.

The global trade reduces domestic players’ pricing flexibility. Any price hike from domestic players will result in higher imports by steel consumers. This means lower sales for local steel producers.

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