By Steve Latin-Kasper
NTEA Director of Market Data and Research

In the markets for steel and aluminum, there are a number of factors influencing demand for and supply of the products made from those metals. On the supply side, a short list of relevant factors could include metal manufacturing technology, mining technology, the amount of new ore mines, the number of metal manufacturers, and government subsidies and regulations. From ore to final product, there are numerous direct and indirect connections between the mines, manufacturers, distributors and governments.

Of primary importance on the demand side of any metal market is the concept of derived demand. A truck manufacturer doesn’t buy steel because the owner likes it, but rather, because the company needs it to supply consumer demand for its products. In short, that company’s demand for steel is derived from demand for its products. Consequently, the demand for trucks and equipment, autos, laundry machines, refrigerators, stoves, grills, tools and all other products made from metals influences the demand for —and therefore, the price of — metals.

Market complexity doesn’t necessarily lead to market volatility, but it can be a contributing factor. For example, in the U.S., energy/environmental issues have led to the creation of corporate average fuel economy (CAFE) regulations, which have led to the production of more fuel-efficient vehicles. One of the ways to make a vehicle more fuel-efficient is to make it lighter, and since steel is heavy, producers have tried to substitute other materials in autos and trucks. All other factors held constant, this led to less demand for steel from the motor vehicle industry. Therefore, CAFE led to lower demand for steel and higher demand for aluminum and plastic, as well as corresponding changes in prices.

Long story short, a change to any factor that influences demand and/or supply of steel can cause a change in price. Since hardly a day goes by that multiple relevant factors don’t change, it should come as no surprise that steel prices tend to be volatile. This is what makes steel price activity in the past year so unusual — prices have been remarkably stable.

Future Expectations
As shown in the chart below, the prices of hot-rolled sheet/strip and plates/bars have basically been flat since early 2011. In that same time period, the price of cold-rolled sheet/strip fell and then stabilized in the first quarter of 2012. Historically, the last time hot-rolled sheet/strip prices were this stable was 2007, after which the market was witness to the biggest price spike in recent history.

Due to the complexity of the market, it’s difficult to forecast the future direction of steel prices. If the Chinese and European Union economies continue to grow more slowly than their recent historical trends, steel prices will likely remain stable through 2012. Economic forecasts for 2013 are generally more positive than for 2012, though, so this period of steel price stability should not be thought of as the new normal. Instead, it may present an opportunity for steel buyers to plan whether they should stock up while prices are relatively low or maintain current inventory levels.

If you have any questions or comments about this article, please contact me at (414) 294-3408 or e-mail stevelk@ntea.com.