Peak Steel?

Steel, the alloy of the industrial revolution and everything that followed, is now in such short supply that actual worldwide growth is threatened. Since World War Two, the main source of steel has been scrap, produced by a consumer driven economy's massive usage of short life span products, such as cars and refrigerators.

All of this changed radically with the monumental growth of China's infrastructure.

The problem with infrastructure, of course, is that it locks away steel not for mere years but for multiple decades and even centauries. Add to this the massive expansion, worldwide, of energy infrastructure and a shortage, quite separate of consumer consumption appears. No longer are oil or gas pipelines running a few dozens of miles from Arab oilfields to their coastal ports. Now oil and gas fields are often located in very remote locations, requiring hundreds or thousands of miles of pipeline to deliver their products. When one begins to consider the boom in off shore drilling, the giant steel platforms that support it suck up tens of thousands of tons of steel each.

To fully appreciate the value of scrap, one must realize that scrap steel accounts for 60% or more of the yearly steel production, worldwide. As such, demand on steel has grown by around 10% annually for the past three years and is projected to continue at this level through at least 2013.

Even with market economics at play, there seems to be little if any slacking in demand: scrap steel prices have risen from $250/ton in the beginning of 2008 to over $500/ton in May (with China paying about $100 to $150 above these rates and mostly to the US as scrap and junk are America's number one export...go figure). Prices are now projected to rise to an unbelievable $1000 per ton by October 2008 and there is no end in sight. Even the looming US recession and downsizing of the US auto industry, in production and size of automobiles, has had no effect on prices.

There are several trends in play and none of them involve hording or commodity speculation. Scrap dealers will not allow steel mills to buy extra materials in excess of their monthly needs, not without charging huge surcharges to make up for projected losses of future value.

With the weakening of the US dollar, American scrap has been heading out in mass to China, robbing US steel makers of their key product component. European scrap has also been heading to China and also Turkey. Russia's scrap, which used to supplement Europe, is now being consumed at home. Much of that reworked steel is also headed to China, the black hole of all commodities.

This was the situation before the massive earth quake that struck China. Now China plans to rebuild all its losses and add to them in less than 5 years. That's a lot of steel.