The Steel Market
Steel has been used by man for years as a building tool. The earliest known production of steel are pieces of ironware excavated from an archaeological site in Anatolia and are nearly 4,000 years old. The process of steelmaking has existed for centuries, but it was not commercialized until the 19th century. In modern times, steel is widely used in building infrastructure including roads, railways and buildings. Steel is also used in household appliances, cars, airplanes, and even watches.
Steel is an alloy of iron and other elements, primarily carbon, but other elements are also added to impact steel’s physical characteristics. The other elements are added to steel to impact its physical characteristics, making it suitable for a variety of applications. For example, manganese can be added to improve the hardness of steel, making it more appropriate for certain building projects; chromium is added to create the well known “stainless steel” that is corrosion resistant.
How is Steel Made?
To make steel, iron ore is heated in a blast furnace to remove impurities such as nitrogen, silicon, and phosphorus. Alloying elements such as manganese, nickel, chromium and vanadium are added, as needed, depending on the type of steel being made.
Steel Market Drivers
With steel used in infrastructure and consumer goods, it is apparent that it is an economically sensitive commodity whose price is positively correlated to economic health. When the economy is expanding, infrastructure spending increases and consumers purchase more goods. This leads to an improvement in the steel market. Conversely, when the economy slows so does demand for steel. Another driver for the price of steel is the price of energy. Steelmaking is an energy intensive process, therefore, when the price of energy goes up so does the cost to manufacture steel. Steel producers may try to pass this cost on to consumers.
Major Steel Producers and Consumers
The biggest steel producer in the world, by far, is China, which produces about 50% of the world’s steel. China is followed by the European Union, Japan, and India.
The biggest steel importer in the world is the United States followed by Germany, China, South Korea and Italy. With these countries being the major importers of steel, it makes sense that their economic health is an important part of steel demand.
There are plenty of options for investors looking to gain exposure to the steel sector including ETFs, stocks, and futures. For the most direct exposure to the commodity traders choose futures, although they are the most complicated form of investment.
There are a variety of different steel futures traded on different exchanges around the globe. The London Metal Exchange, The NYMEX, and the Shanghai Futures Exchange are three of the top exchanges that offer steel futures.
Steel futures traded on the London Metal Exchange are priced in U.S. dollars per ton, with a lot size of 65 metric tons. Warrants created under the LME Steel Billet must conform to one of nine grades, each of which must meet certain physical requirements. The requirements of each of the grades is the proportion of elements allowed: carbon, silicon, manganese, sulphur, phosphorus, copper, nickel, chromium nitrogen. There are also specifications relating to the size of the steel the contracts, with the two options being short or long.
Steel futures also trade on the NYMEX under the symbol HRC. Each NYMEX contract represents 20 short tons, and is priced in dollars and cents per ton. NYMEX steel futures represent U.S. Midwest Domestic Hot-Rolled Coil Steel, and are subject to NYMEX position limits. There is also the option to purchase Steel Billet, FOB Black Sea (Platts) futures contract.
Another exchange that offers steel futures is the Shanghai Futures Exchange. The Shanghai Futures Exchange (SHFE) is one of the largest commodities markets in China, and for steel the options are SHFE Steel Wire Rod Futures and SHFE Steel Rebar Futures. SHFE steel rebar futures trade in 10 tons/lot contract size; there are a number of different grades of the contract with both standard products and replacement products. Wire rod also has a contract size of 10 tons/lot and the Shanghai Futures Exchange specifies grade and quality required with both standard and substitute products.