The questions most people are contemplating are: to what extent will steel prices retreat in future months, and will they stay low?

Veterans in the steel industry and steel users have seen steel prices spike many times in the past, only to quickly retreat, many times to new all time lows. Are we likely to see a return to this type of pattern any time soon or have we seen a true structural change in the global steel industry, one that will alter the familiar pattern of pricing? We have experienced a structural change in the steel industry and that this will change pricing patterns for at least the next several years.

The seeds of the structural change were sown more than 20 years ago. Since the early 1980s, profitability in the global steel industry has been well below its cost of capital. When an industry does not earn it’s cost of capital it does not re-invest in infrastructure. As a result, throughout the last 20 years there has been little investment in infrastructure. Investment has been mostly in finishing mills and electric furnaces. As you will see this investment has actually exacerbated the problem.

The wave of steel making capacity built in the 70s and 80s by emerging economies, coupled with the capacity released from the dissolution of the USSR in the late 80s, led to a large amount of excess capacity in the global steel market.

As recently as last summer, conventional wisdom put global steel supply at about one billion tons and global steel demand around 850 million tons. Since that time this overhang in supply has melted away due to the increase in demand from China and the rest of the world ending its cyclical economic downturn. As China’s steel consumption has been growing, it has not only filled up the world’s excess capacity, but it has also put pressure on the global supply of raw materials for steel making.