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The Next Economic Crisis

Rising steel prices may cause more problems than fuel.

Back in 2006, the price of steel went a little bit crazy for about a month. Base prices, discounts and surcharges all fluctuated weekly – even daily. In the end, contracts were not honored and customers were charged whatever the market would bear on the day of delivery. Scrap, which had sold for 60 dollars a ton back when gas was $1.50 a gallon, was going for 150 to 200 dollars a ton depending on location.

Then things normalized. Prices went down a little and stayed more or less stable. There was some speculation for a while about whether the claimed shortages were real or the steel companies were just being greedy, but generally the whole incident was gladly forgotten. Well I hate to be the bearer of bad news, but the elements are in place for real shortages and even more drastic – even catastrophic – price increases.

As we all know, China is currently undergoing an Industrial Revolution with 10-20% annual growth for the past several years. They are consuming 40% of the world’s concrete, and other resources at a similar rate. In spite of their huge land mass, they are lacking in some of the resources needed to fuel this growth. What they lack, they are purchasing on the world market, including the recent purchase of some mines in the United States. And the Chinese are not the only emerging, resource-hungry economy in the world.

The problem isn’t just that we now have some serious competition as consumers. The real problem is the way this country has responded to the threat of limited resources.

We haven’t built a new nuclear plant in decades due to legitimate concerns and safety. The French, on the other hand, have continued to develop nuclear technology and have built several new, more efficient and safer nuclear plants than the outmoded ones struggling to keep up with energy demands in this country.

We haven’t built a new oil refinery in this country for decades, and the ones we have can’t handle the oil produced in this country. As a result, Alaska oil is shipped to Japan, where newer, more efficient plants have no problem with it.

In other words, while other countries have focused on the efficient exploitation of resources, we have relied on two failed initiatives:

Conservation. If resources are limited, we’ll just use fewer resources. Leaving aside for a moment the fact that Americans by and large refuse to commute to work on a bicycle, this just means that resources are purchased by less environmentally conscious consumers, driving up the prices on the things we do consume.

A service economy. If resources are scarce, we’ll just become a nation of computer programmers and burger flippers, leaving all that dirty manufacturing to the rest of the world. Of course, that means we have to buy our manufacturered goods from them.

The result is that the United States has slipped to the third largest producer of steel in the world, and Japan, a country with very few natural resources of their own, is mining more coal than we are. The worst part however, is that we are buying all these foreign manufactured products with an increasingly worthless US dollar. There is even talk of pricing oil by euros per barrel rather than dollars, since the oil producing countries claim that the weak dollar is a major factor in the rapid increase in oil prices.

But back to steel. As a result of all the developments discussed above, world demand for steel exceeds the supply. Last December, reserves were being tapped, and the mills couldn’t keep up. Due to the falling dollar, it became profitable for foreign mills to purchase scrap metal in the United States. In January, the price of scrap reached the previous record high of two years ago, $200 per ton. By February, it was up to $240, by March, $260. Recently, the price hit $440, and it may hit $500 soon.

Steel prices are heading up, and may double or even triple in the near future. This, of course, will drive up the price of everything containing steel, and this hits ever sector of the American economy. Turkey is currently purchasing 60% of the available US steel at a good price, and they are not alone. As foreign demand drives prices up, we will once again hear talk of a moratorium on steel exports to keep prices down – similar to the one mentioned during the crazy time of 2006. Would government controls help? I doubt it. We would be more likely to find a sudden rash of cracked furnaces and other excuses for temporary mill shutdowns until the price goes back up again.

According to industry experts, the price of steel is currently “unpredictable.”

I’ll make one prediction:

It’s going up – way up – and that will just be the beginning.

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