COMMODITIES

Steel’s well-oiled rally

Monday 28 April 2008

Consider it the “Butterfly Effect” of chaos theory…applied to commodities prices.

Consider it the “Butterfly Effect” of chaos theory…applied to commodities prices.
 
Instead of a butterfly beating its wings and causing a gale-force hurricane in some distant realm, we have Nigerian rebels attacking an oil pipeline in the African hinterlands…and making it more costly to build five-star hotels in Dubai.
 
The record-breaking oil rally that we’ve witnessed in recent months (indeed, years) is rippling across commodities, with the spike in metals prices garnering big headlines.
 
Steel prices, trumpets the Financial Times in its Monday edition, have nearly doubled in the past year, with steel billet, a major building component, now costing some $900 a tonne. Iron ore, another major steel input, has skyrocketed 71%, while coking coal has shot up 240%.
 
Higher energy costs imply higher production costs. But as France’s Le Figaro daily points out, the oil boom itself, coupled with a surge in demand from developing countries, is creating a unique inflationary dynamic in the steel sector.
 
Discovering oil, extracting it from the ground and then transporting it to market is a labor-intensive business even in the best of times. And it requires vast amounts of steel.
 
But as supplies dwindle and sovereign governments become more possessive of their own natural resource wealth, multinational oil companies are being forced to go to greater lengths to find and exploit crude in ever more remote and inhospitable places.
 
Europe’s proposed Nabucco pipeline, which would convey gas from central Asia to Europe, would require building a 3,300 kilometer pipeline. That’s a lot of steel. Russia’s state gas monopoly, Gazprom, meanwhile, is hard at work fence-ringing Europe with its own gas pipeline projects (in the North, to Germany via the Baltic Sea, and in the South, to the EU via Bulgaria and Greece).
 
And then, as Le Figaro notes, as oil demand grows, so too does the need for larger tankers and deeper wells.
 
Indian steelmaker Arcelor Mittal (once again according to Le Figaro) estimates that the world will need some 500 million more tons of steel to meet global demand over the next decade. That’s on top of 1.3 billion tonnes at present.
 
And then, of course, there’s the usual suspect – China.
 
The China Iron and Steel Association says domestic demand has now risen strongly for four straight weeks, and has surged 20% in the first quarter alone.
 
China needs all the steel it can get to build the infrastructure underpinning its economic ambitions - but it’s not alone. The Middle East is also teeming with projects - from roads to hotels to resorts.
 
So the next time a butterfly flaps its wings somewhere in Europe, you might want to check the real estate prices in downtown Abu Dhabi.