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What’s Up With Steel?

Help me out here. I’m no economist, but something is really strange with the world steel market. At my place of employment, Pipes’R’Us, we’re seeing welded steel pipe selling for more than seamless steel pipe, which never, I repeat never happens.

Think about this for a minute: The mill price of basic, welded carbon steel pipe–the stuff used for handrails, fences, parking meter poles, and low-pressure gases and liquids–has jumped about 33% since autumn. Mills are now quoting a base price plus a “raw material surcharge in effect at time of production”.

In other words, the mill will tack on a surcharge that may add 10%-25% to the price, but we won’t know exactly how much until the mill begins to roll our pipe.

I gather that the stainless steel market operates that way, but the raw materials for stainless include a lot of chromium and nickel. Carbon steel is part iron ore and part junk cars. This surcharge stuff is brand new for guys like me in the carbon and alloy steel business. For our customers, too, judging by their reactions. (“You want to raise my price by how much?”)

The problem seems to be a sudden shortage of strip steel used to make welded pipe. Apparently China is in the middle of a boom and they’re building a lot of things with steel right now. The Chinese seem to be taking all of the steel their own mills can crank out, and they’ve moved on to buying up steel in most of its forms from the rest of the world. (The per ton price of scrap is about triple what it was a year ago.)

Now here’s where I’m really in the dark. Our experience with companies in China has taught us to ask for cash or a guaranteed letter of credit before shipping the pipe. Simply put, they don’t have a lot of money. So who’s financing all this construction and steel fabrication that’s going on in China all of a sudden? My guess is banks in the region–Japan, South Korea, and Hong Kong, probably.

So what happens if the borrowers default on this money they borrowed to fund the boom?

Meanwhile, Americans are trying to recover from a recession, and bubbling just under the surface of the economy are these skyrocketing steel prices. What does that do to the recovery? What happens when the prices of goods made with steel–cars, buildings, washing machines, refrigerators–jump to reflect the increased cost of making them?

I don’t know the answers to these questions yet, and I’m not too sure I’m going to like them when I get them.

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