STEEL PRICE HIKES ENOUGH TO COUNTER ORE AND COAL COST INCREASES
28 February 2005 - MEPS (International)

Iron ore suppliers from Brazil and Australia have just settled their prices
in Asia with a record-shattering 71.5 percent rise for fiscal year 2005. Other steel producers around the world are holding out against increases on
this scale, describing such an enormous price rise as unsustainable and
damaging to the competitiveness of steel against other materials. They may
not, however, be able to resist the ore suppliers' demands, given the
tightness of supply and the growth in global consumption, which is expected
in the first half of this year.

It is clear that steelmakers dependent on imported iron ore are facing a
massive expansion in the cost of their principal raw material. It comes on
top of a 119 percent increase in the price of hard coking coal from major
Canadian and Australian suppliers, to a 2005 level of $US125 per tonne fob
from $US57 per tonne in 2004.

Other costs of producing steel have also risen - alloys, energy and
transport being among the most prominent. There is much talk of steel
producers 'struggling' to pass on these greater expenses to their customers
in the form of higher steel prices.

Last year it was, in reality, not much of a struggle. Steelmakers were in
fact wildly successful in passing on higher raw material costs to their
customers. They paid an 18.6 percent rise in the price of iron ore and sharp
hikes in other input costs, but were still able to report record profits for
2004.

Mills' complaints about raw material suppliers taking too big a share of the
steel 'value chain' are somewhat overdone. The pain was felt by end-users;
there were several high-profile bankruptcies among automotive industry
suppliers, and many steel-using manufacturers reported lower profits because
of higher steel costs.

So how will this year's leap in ferrous raw material charges play in the
market? MEPS calculates that the higher prices for iron ore, coal, coke and
freight will add roughly $US100 to the cost of producing one tonne of steel.
This is a significant increase but it has to be put in context. The price of
steel has risen by far more than this.

The MEPS World Average Price for flat rolled carbon steel products went up
from $US387 per tonne in January 2003 to $US449 per tonne one year later,
and to $US725 per tonne in January 2005. Over those two years the price of
steel increased by 87 percent or by $US338 per tonne.

Looked at another way, the MEPS average flat product price in 2004 was
$US540 per tonne, and this year our estimates suggest it may be $US680 - 690
per tonne - bringing the mills additional revenues of $US140/150 per tonne.
Taking this into account, a raw material increase of $US100 per tonne starts
to look manageable.

Our projection for flat rolled steel prices this year is for them to reach a
peak during the first and second quarters and then gradually decline, though
without any drastic fall. If the decrease in prices by the end of the year
is of the order of 10 percent, steel mills' current margins may be somewhat
eroded. Nevertheless, a number of them may still report further record
results for calendar 2005, despite rising costs of other inputs - due to
strong first half performances.

Source: MEPS - International Steel Review

http://www.meps.co.uk

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