Saturday, May 17, 2008

WSJ: Fast Rising Steel Prices Set Back Big Projects

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Inflation is a tax on all people, companies, and countries. This is exactly the type of thing that we are beginning to see in the corporate world [May 14: Deere Earnings - Why I'm Avoiding Equipment Stocks] and what I believe is the largest threat to the 'global growth' story. The 'World of Shortages' thesis I've been talking about since day 1, continues to devour everything in its path. At some price point it no longer makes sense to build things, even for China (although they are forced to, to swallow up the masses of populace moving from the countryside to the cities). I have to say I've been amazed that the steel companies can continue to pass along all costs to their end customers but at some point this stops. The point seems to be closing in.

Unfortunately as investors this races some serious questions; much of the current investing themes are based on global growth. If that takes a sharp downswing, we face the potential of (a) global recession and (b) not much to invest in - I guess we'd have to flee back into US banks and retailers? Yikes. And if you think global recession seems far fetched keep in mind, in 2006 (I don't have the exact figures) but something like 156 of 157 nations showed GDP expansion. So the opposite is not out of line. Oil at $175-$200 and raw material costs at levels that simply make it not worth to build (for most countries) and/or makes producing products unprofitable for many companies would cause serious hardship. Not saying this is the road we will travel, but simply outlining one potential path. At some point these high prices go from being "cute" and "great for companies that product these things" to major threat to global growth.
  • Relentless increases in the price of steel are halting or slowing major construction projects world-wide and investments in shipbuilding and oil-and-gas exploration, setting the stage for a potential backlash against steelmakers.
  • In Turkey, a construction association said this week it will begin a 15-day strike in eight cities Thursday to press steelmakers to cut their prices, which have more than doubled locally since late last year.
  • In New Delhi, India, an ambitious bridge project has been put on hold because of steel-related cost overruns, and contractors are postponing or reining in construction of much-needed housing for the poor, prompting the Indian government to freeze steel prices for the next three months.
  • Venezuela, aiming to control prices, renationalized its largest steelmaker and is limiting exports. Oil executives in the U.S., meanwhile, say costly steel is threatening their energy exploration efforts.
  • Globally, steel prices are up 40% to 50% since December, and industry executives say they haven't hit their peak. Also the cost of alternatives, such as aluminum and certain plastics, is increasing.
  • Iron-ore prices have risen 71% this year. Two other crucial steelmaking ingredients, coking coal and scrap steel, have doubled in price.
  • While still in a position of pricing power, steelmakers are concerned that over time, their high prices will affect sales. "There will be impact on demand, and that is not a good development for the steel industry," said Aditya Mittal, chief financial officer of ArcelorMittal, on a separate conference call.
  • As a result, steelmakers are taking steps to cut their costs. To shield themselves from higher raw-material prices, more of them are acquiring their own iron-ore and coal mines or deposits, as well as producers of scrap steel.
  • Some nations, meanwhile, are hoarding steel by erecting export barriers. Last week, India imposed a 15% duty on exported steel. Countries that don't make enough of the metal are slashing import taxes in an effort to attract more. Last month, Iran announced it was lowering its import tax on rebar steel, used in new buildings and roads, to 9% from 20%. (sound familiar? we were typing the same things about agriculture products a few months ago - the World of Shortages will lead to major international strife - this is only the beginning stages of a multi decade issue)
  • The impact of high steel prices is rippling through industries from shipbuilding to energy exploration.

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