Chinese steel takes a bite out of manufacturing profits

June 2, 2005
Steel is by far the largest physical input to the machinery sector, and last year the price of almost every steel product at least doubled.

Several rose over 250%. In general, machinery manufacturers couldn't pass on most of the increases and suffered declining profits despite strong demand.

In a study prepared for the Association of Equipment Manufacturers (AEM), the Farm Equipment Manufacturers Association (FEMA), and the North American Equipment Dealers Association (NAEDA), the economics consulting firm Global Insight Inc. cites a number of reasons for the explosion in steel prices:

Among them are explosive growth in the Chinese steel industry; underinvestment in mill maintenance, in new iron ore and coal mines, and in coke ovens; a depreciating dollar, which made steel imports more expensive and revived export markets; and extremely low import levels in 2003, partially resulting from Section 201 tariffs. The low imports resulted in an inventory deficit once domestic demand started rising last year. Other factors include sharply higher prices for scrap; soaring shipping costs due to increased global trade combined with the relatively constant fleet of dry bulk carriers (ore) and container ships (scrap); and growth in industrial production in the U.S., Europe, and Japan, as well as China.

China now consumes and produces nearly one-third of the world's steel and accounts for more than half the growth. The deflated Chinese currency, which is pegged to the dollar, further bolsters its competitiveness in export markets.

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