World Steel Dynamics Finds Four
Themes in ‘Spectacular Year’

In the days leading up to the spectacular announcement that the world’s two largest steel companies had agreed to become one, the top analysts at World Steel Dynamics had already declared that “Steel is Spectacular.”

As has become tradition, Peter F. Marcus and Karlis M. Kirsis delivered the opening remarks in tandem at American Metal Market’s Steel Success Strategies conference in New York in mid-June. The pair identified four key themes underlying the global steel market in 2006, all of which indicate that the steel industry is strong and getting stronger:

• The steel market is fundamentally improved.
Three key factors provide a steady foundation for steel profits, Marcus and Kirsis said. First, global steel consumption is forecast to grow at a 3 percent clip for the next decade. Second, as many in the steel industry have noted, the ongoing consolidation among steel producers has improved their pricing power.

And third, the yuan will sizably appreciate in the coming year because of China’s “unstoppable and growing trade surplus.” Moreover, the analysts said, China’s reputation as a manufacturer will also improve to the point where “Made in China” will be considered a quality imprint.

Nevertheless, China itself won’t benefit from this improvement until it begins to follow the lead of the rest of the world in regards to production, they said. Unlike most steel company management teams, Chinese leaders are political appointees with a production-driven mindset, which leads to reductions in price as supply outpaces demand.

“It has to happen one or two more times. Then they will learn you have to vary the volume and not the price,” Marcus said.

• The steel industry has caught a growth virus.
The information revolution is having a profound impact on the industry, the two analysts suggested, allowing it to develop “youthful characteristics and new behavior patterns.”

They credit the revolution to fostering faster unit growth; creating a more global marketplace; improving product quality; reducing costs at a rapid rate; speeding up mergers and acquisitions; harnessing new technologies; gaining market share from competing materials; promoting competition among firms; lowering capital costs in plant construction; changing the structure in the industry; rewarding winners; and improving profits over the cycle.

“The information revolution stimulates global economic growth. Global economic growth stimulates more fixed asset investment in construction and capital equipment,” they added.

Steel demand is tied 40 percent to construction markets, 40 percent to capital equipment spending and 20 percent to production of consumer durables, making it the perfect mix to benefit from the global economic growth caused by the information revolution.

“The information revolution growth hormone is still young. It can only be stopped by high inflation—which it prevents,” they said.

• Financial trading of steel products and steel scrap will grow explosively in the next five years.
The theme that World Steel Dynamics is most closely invested in is the trading of steel futures. Trading will not be tied to any physical delivery of steel or inventories, they said, but will surge because of the availability of “benchmarked steel prices and the huge need of buyers and sellers to hedge the steel-price risks.”

They forecast that trading activity on futures exchanges within five years will amount to $20 billion per year, or 20 times the current delivery rate for steel products.

Also contributing to the need for a futures exchange, they said, are the huge price differences between countries and regions, and the price spread discrepancy between differing steel products.

The zeal of financial investors to become involved in steel will also lead to greater futures trading. “Like a moth to the flame, the financial investors will be attracted by the ability to hedge the stock against the product prices,” they said.

Though some steel industry executives believe otherwise, Marcus and Kirsis said the large number of steel products that can be price hedged (including hot- and cold-rolled coil, plate, rebar, billets, slab and scrap) do not make futures trading less manageable.

Of course, World Steel Dynamics champions the idea of futures trading, and is marketing its own Steel Benchmarker system throughout the industry. WSD receives financial data from 47 steel companies to develop a price recording system to be used as a basis for “settling financial contracts on futures exchanges.”

“The ability to hedge the steel price risk will be a major win for steel mills, traders, service centers and steel users,” Marcus and Kirsis asserted.

• 2006 is a unique year for the steel industry.
The early bid by Mittal Steel to acquire Arcelor (which was accepted after the Steel Success Strategies conference; see details in Metal Industry News) guaranteed that 2006 would be a memorable year for the steel industry. Marcus and Kirsis said they could see value in either a Mittal-Arcelor combination or an Arcelor-Severstal merger. A Mittal-Arcelor merger would create one of the world’s largest companies, “promoting further growth in the structure of the global steel industry,” while an Arcelor-Severstal combination would promote additional consolidation efforts as companies angled to take away the top spot.

Additionally, though just a few weeks earlier WSD had predicted that the world export price for hot-rolled band would undergo a dramatic price spike followed by a serious plummet, the analysts said they now believe that equalizing pricing pressures will lead to a more stable steel price through the balance of the year.

Overall, Marcus and Kirsis said they see considerable reason for optimism in the years ahead, both for steel companies and their investors.

“Steel is spectacular. Many of the leading companies in the industry are world-class enterprises when it comes to growth and initiative. The sharply rising stock-market values of many companies in the past few years is an important indication that the change for the better is being recognized,” they said.