Steel Study Examines Impacts of Price Increases <br>on Off-Road Equipment Industry

Enlarge Image Comparison of U.S. and Chinese Apparent Steel Consumption from 1996 to 2003.

May 4, 2005 — In response to the ongoing steel crisis, the AEM, Farm Equipment Manufacturers Association (FEMA), and North American Equipment Dealers Association (NAEDA) have joined together to conduct a study that examines the causes of the price increases and the impact these factors on agricultural- and construction-related machinery makers and dealers. The study, “Steel Markets: Causes and Factors Affecting Steel Prices in the Near and Medium Term,” was prepared by the economics consulting firm, Global Insight, Inc.

 

The AEM-FEMA-NAEDA steel study cites several principal reasons for the rapid increase in steel prices. As expected, Global Insight found the most important factor identified was explosive growth in the Chinese steel industry that strained global supply and lifted prices worldwide for steel making raw materials. This is a permanent change and will affect markets for decades. Another factor the study singled out was a decline in steel prices over the two previous decades that led to under investment in mill maintenance and new mines/facilities for raw materials in the United States. Also cited in the survey was the depreciation of the U.S. dollar, tariffs on imported steel, increased prices for scrap and stronger industrial production in the United States, Europe, and Japan.

 

In addition to China, the study then examined other global short- and medium- term factors that could affect future steel prices, including probable growth in India. Among the short term factors were the risk of stagnation in Japan and Western Europe, and the possibility that tariffs against low cost steel producers, such as Brazil and Russia, would be lowered or eliminated. The most important medium term factor is the probable rise of India, which could enter a growth pattern similar to China, causing a second dose of the steel demand.

 

The final section of the study looked at policy factors and their possible effects on steel prices. Further devaluation of the dollar is one policy that will cause steel prices to have a stronger profile but also increase demand for finished goods in the United States. Continued consolidation of the steel industry is assumed to lead to somewhat higher prices but also to introduce a measure of badly needed stability that will benefit both buyers and sellers. Various steel trade protection measures, including anti-dumping, quotas, and voluntary restraints, have helped protect the domestic steel industry but have also caused costs to be much higher for equipment manufacturers. Prevention of unfair practices should remain a policy goal but excluding foreign steel because the domestic industry is not competitive should be opposed. Bottlenecks at port facilities are hampering the flow of trade, so expansions of port facilities in another factor that would positively affect steel prices. The Jones Act protects domestic merchant marine industry but causes shipping costs to be artificially high, which are passed on to the steel industry and ultimately steel buyers. Finally, limiting scrap exports will lead to lower steel prices, but in the long term would be self-defeating.