Friday, June 24, 2005

Motley Fool on the Steel Market

Has China Caused a Metal Meltdown?

By Stephen D. Simpson, CFAJune 22, 2005

It’s been a rough year so far for iron and steel companies and other
metal-related stocks. Once among the market’s leading sectors, metals have now
become laggards.
The basic cause is not altogether complicated. Just as a
steel shortage in the back half of 2004 triggered a price boom, increasing
supplies have weighed prices back down. While world economic growth has been
okay, it hasn’t been strong enough to absorb all the new supply flooding the
Once again, we see the basic pattern of a commodity cycle. Producers
fall behind in capacity, and buyers begin to consume inventory. Demand then
continues to increase to the point of supply shortages, leading to a spike in
prices. Suppliers increase output by more than enough to satiate the demand, and
prices are pushed back to the point where it no longer makes sense to continue
increasing output in earnest…….
The article goes on to examine China’s rapid economic expansion (not least in it’s steel capacity), and its effects, and likey future effects upon prices as it moves in to a situation where it is likely to become a major exporter of steel.
It demonstrates the basic economic facts that drive most markets including steel. Supply, demand and price are always closely linked and will fluctuate until a “balance” is reached, oversupply forces prices down and shortage drives prices up. The problem with steel is that “gearing up” to increase production can be a slow and expensive business, production cannot be turned on and off like a light switch. The long term investment required to build new production facilities calls for accurate assesment of future demand and pricing. Considering that few (if any) were able to forecast last year’s massive price increases and the speed with which prices have subsequently fallen even months ahead, I don’t envy the guys that are required to look forward over the next ten years!

And a view from inside China!
BEIJING, June 22 (Xinhuanet) — A Chinese expert has called for reducing steel output in an effort to straighten out market order and stabilize prices, which saw a downward trend starting from April……..

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