Steel-consuming industries had better get used to the fact that steel prices may not dip below $300 per ton again for quite some time. Now that the steel industry is finally getting its act together, steel users should take a long, hard look at their own business models and plan for a future in which they can no longer count on cheap raw material to perhaps mask their other strategic shortcomings.

Speaking at a recent conference, Andrew G. Sharkey III, head of the American Iron and Steel Institute, recalled how just a few short years ago the North American steel industry’s business model was considered broken and untenable. Steel prices had fallen by 2 percent per year in real terms over the past 25 years, to levels at or below the cost of production. Mills were struggling to stay afloat. Over 55 million tons of U.S. steelmaking production was forced into bankruptcy protection in a painful four-year restructuring process that eventually resulted in the closure of more than 30 million tons of capacity.

Record-low steel prices early in the decade effectively resulted in a massive transfer of wealth to downstream customers, Sharkey said. Many steel customers came to believe that this was the norm and would continue into the future, building their business plans around these unrealistic prices. In many cases, low steel prices became the alternative to improving their own operating practices or consolidating their respective industries, he said. “In short, the strong steel market last year made it clear that the business models of some customer segments were also broken.”

With steel prices and margins at historic highs, most steel producers reported record results for 2004. The fundamental question is, what will they do with the cash? “Historically, the industry would respond to the one good year (out of 10) by building new capacity just in time for the next downturn,” Sharkey said.

Instead, today’s steel industry leaders—at least those in North America—are looking strategically at using these newfound earnings to reduce debt, accelerate pension payments, increase dividends, invest in new technology and

make acquisitions.
While high prices are likely to spawn some new production capacity, especially in China, Brazil, India and Russia, it’s unclear where those mills plan to acquire the necessary scrap, coke and other inputs.

“Isn’t it ironic that severe raw materials constraints may be the key to saving the global industry from another bout of oversupply?” said Sharkey, who expects metallics prices to remain well above historical levels.

Steel users are understandably upset about the high steel prices. They have seen their cost of raw materials double or even triple in the past few years. Their trade groups have argued at ITC sunset review hearings that antidumping and countervailing duty orders on certain steel imports are no longer needed.

Whether that’s true or not, their actions need to go beyond political maneuverings. They need to recognize that the steel industry has undergone a structural change, and that today’s lofty steel prices are not just the result of the latest economic cycle, guaranteed to cycle all the way back at some point.

Distributors, you can do your customers a service by helping them understand the reasons behind today’s high steel prices—and the reasons they should say goodbye to the rock-bottom prices of the past.