Last week’s announcement of a near 100% increase in iron ore prices is certainly significant news for the building industry, where current contract prices are sub-economic and inflation is already in the system
Corus has already announced rises of up to £130 per tonne for sections, which could add more than 10% to currently heavily discounted rates.
On the up side, the doubling of the ore price is unlikely to usher in the scale of steel price inflation seen in 2008. Back then, prices paid by clients rose by 50% in less than nine months. The big difference now is that other factors which affect pricing – particularly the cost of coke and shipping, and the demand for steel – are not all rising as fast as they did in 2008. It was a perfect storm of factors back then, but that is not the case now. In particular, construction steel volumes are more than 40% off their peak, and weak demand is likely to limit the ability of stock-holders to push 100% of manufacturers’ increases through.
With regards to the changes in the pricing system, the steel market is now much more responsive to spot prices, so we need to pay even more attention to the health of the Chinese manufacturing and construction sectors, which account for 50% of global steel production. We will no doubt also see growth in derivatives offered around steel markets, enabling some price risk to be hedged.
Simon Rawlinson is a partner in Davis Langdon