By Scott Brauninger
So far this year, steel prices have risen sharply. We’re paying at least 30% more than we did in October 2009.
What’s going on here?
Other than the fact that steel prices plummeted dramatically last year, and probably had nowhere else to go but up, part of our quest for answers led us to a story about the current squabble that’s going on in the global steel and iron ore businesses.
Over the last 6 months, the iron ore producers have decided that they are tired of selling ore at a year-long fixed price. So, they’ve demanded that steel producers pay spot prices, or at least, accept quarterly adjustments to pricing.
Steel producers, and the governments that house them, are outraged at the proposal. China has gone so far as to arrest Rio Tinto executives and put them on trial for taking bribes related to ore pricing.
If the ore producers get their way (and it looks like they will), raw steel production costs will rise. According to The Financial Times, last year’s iron ore spot price which was $61/ton is now at $144/ton. So, expect iron ore prices to basically double from last year’s price; at least in the short term.
This doesn’t necessarily translate directly into steel prices doubling domestically. Most of the steel we use is derived from recycled steel already sold on the spot market. Fortunately, or unfortunately, these prices have already escalated, and its likely they will remain somewhat stable in the near term (we hope).
You’ve heard it before, and you’ll hear it again; strong overseas demand is the reason for the rise in all these prices. But, the miners aren’t the only ones driving up the price. India, a major exporter of iron ore to China, imposed export taxes on Indian iron ore to ensure there would be sufficient supply for their own needs.
What are we going to do if prices continue to rise with global demand ?
There’s no doubt that rising construction material prices here in the USA are the last thing anybody wants to hear about. Just when a development deal seems to have some value, its frustrating to see the value evaporate into the pocket of foreign ore miners.
However frustrating pricing increases might be, they are signs of recovery. Everlasting deflation is bad for business, and we’ll take economies growing overseas than no growth at all.
So, where does that leave us for the short term ?
If you get outside of the USA right now, you’ll see development moving along. Maybe not at the frantic pace like before, but still moving.
Its easy to listen to the news and think that China and India are the only economies left standing in the world right now. However, places in the Americas such as Panama, Colombia, Peru, and other places many of us have been programmed to be frightened of are still growing at respectable paces.
Panama, a very small place really, with only 3.4 million people, is still on the move. Panama is constructing new roads, bridges, new residential towers, marinas, canal infrastructure, a metro, and is just finishing a land reclamation project in the capital. In 2009, Panama’s unemployment rate was 7.1%; lower than California. Panama’s consumer economy is booming. Even their national airline, COPA (a great airline by the way), is still profitable.
In Colombia, the Colombian Peso was one of the fastest appreciating currencies in the world last year. Inflows of foreign capital and growing natural resource utilization have strengthened the peso so much that Colombia has been forced to buy tens of millions of US Dollars every day to try to keep their exports competitive. Unfortunately, this makes Colombia more expensive at the moment. However, their own purchasing power for imported goods has increased dramatically, and if you’ve got something to export there, the time may be right to check it out.
In Peru, the Peruvian stock market was up over 100% last year (2009). Hopefully a mutual fund you owned was smart enough to invest there. Peru and the USA have also recently ratified a Trade Agreement. There’s even Starbucks in Lima, so you won’t feel totally lost.
The USA has a strong history of overseas development. We built the Panama Canal after basically taking Panama away from Colombia, and we did that 100 years ago. Short of starting your own revolution to spur your business, perhaps a simple exploratory trip to an emerging economy will do.
If you’re like us, and tired of listening to self fulfilling prophecies about a double dip recession while the rest of the world is moving along, stop watching CNN, jump on a plane, and see what you can do outside the USA while US industry recovers (and it will).
By Ross Edwards