The heat is on for the steel price this year

Kathleen Brooks
THE price of industrial metals has been hit during the recent bout of market turbulence. But against this backdrop pressures have been building that could drive the price of steel higher again.

The industrial metal, widely used for the production of infrastructure, is being bolstered by several factors. The first is supply and demand. Supply has been ramping up since the recession, however it is not enough to offset surging demand, and supply remains below the historical average, according to Goldman Sachs.

At the same time demand for steel continues to grow, with china leading the way. But could measures imposed by the Chinese authorities to slow growth hurt steel? Shamim Mansoor, head of precious metals sales at ETF securities, doesn’t think so: “China’s GDP grew by 11.9 per cent in the first quarter of this year, although the tightening might go some way to slow growth it won’t have a major impact and we expect that demand for steel won’t fall off a cliff.”

India is also growing in importance for the steel market. “India is like the next China, they are building huge amounts of infrastructure, which will require lots more steel,” Mansoor adds. Research by the Global Steel Association found that steel demand did not fall as much as expected in 2009, and expects demand to grow by more than 9 per cent this year.

The second thing driving the steel price is changes to the way iron ore contracts are negotitated. Steel is an alloy that requires iron ore and vanadium as its main inputs. Iron ore’s price used to be determined by contracts negotiated annually, however, earlier this year that changed and contracts will now be negotiated quarterly: “The new quarterly contracts will take into account the current spot price for iron ore, which means that instead of the price becoming outdated after a few months, now when the spot price moves higher, this will be reflected in the contract,” Mansoor says.

Higher iron ore prices will give steel suppliers more pricing power, which should boost margins, Mansoor adds. On top of this, vanadium is also facing a supply shortage due to a mining strike in South Africa.

The easiest way to get exposure to steel is to invest in production companies including Arcelor Mittal and BHP Billiton. Societe Generale and Royal Bank of Scotland offer covered warrants on BHP Billiton, Rio Tinto and Anglo American. For investors who want a broad-based exposure then ETF Securities offers a steel exchange traded fund (ETF), which tracks the world’s largest steel producers.

Internal pressures are turning up the heat on the steel price this year, and it could make an attractive component of any portfolio.