As anyone who has received an astronomical hotel phone bill will know, it helps to know costs in advance. This applies to manufacturers as well, who tend to like reliable delivery of materials at preset prices. But agreeing to supply such contracts may reflect a lack of market power. If you can pass higher costs straight on to customers, why tie yourself down?
Such a thought may be going through the minds of steelmakers. Spot prices for the metal have leapt this year in response to the dramatic increase in prices for coking coal and iron ore – the two main ingredients of steel. The cost to produce a tonne of steel has risen by about $200, or almost half.
Contract prices for coal and iron were agreed by miners and steelmakers later than normal this year – in March and April. But agreements with the carmakers – who take almost a fifth of steel production in the developed world – will have been signed the previous autumn. The flat steel they use is tailor made but about 40 per cent of it is wasted in pressing the car parts, and sold on as scrap. Typically, therefore, the carmakers get the initial benefit of rising spot prices.
A change may be in the air. In April, ArcelorMittal began to add surcharges to steel contract prices in the US. This reflects the new level of pricing discipline that concentration has brought to the steel industry there, with volumes sacrificed to maintain prices. Spot prices for steel have also jumped in Europe in response to higher raw material costs. It is too much to believe that steel has entirely shrugged off its cyclicality – falling Chinese exports and low inventory levels this spring have helped – but the prospects for this year and the next remain remarkably bright.
