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Skyrocketing steel costs could boost machinery prices

Try as they might, machinery manufacturers will find it difficult to keep a lid on implement prices this year.

A worldwide shortage in the raw materials needed to produce steel (iron ore, scrap steel, and coke) is causing its price to soar. The cost of materials like hot-rolled coil steel has skyrocketed over 60% since last summer. Coil steel prices stood at $482 in February compared with $364 per ton in December and $343 in September. Steel prices even climbed after President Bush lifted tariffs on imported steel in December.

The prespective is that steel and iron prices will remain high for the first half of the year settling down as raw materials production increases. In fact some experts predict that prices will not be as high as they have been in the past. For example, steel prices on average in the mid-1990s were $50 higher ($450 to $460 in 1994 and 1995 compared to $420 to $430 today) per short ton of steel on average than today.

Per ton prices for hot rolled coil steel were $432 in February 2004 compared to $345 in February 2003 and $251 in February 2002. Recent increases in this production was $432 in Febuary 2004 compared to $343 in September 2003. The decade low price was $241 which occured in January 2002.

Pressuring recent steel prices up is China's rapidly expanding economy. For example, China's demand for steel rose 38 million tons last year which is equal to the annual steel usage in Mexico and Canada, combined.

All this has lead to speculation and steel hoarding. And this has made the price problem worse. As such old contracts are often not being honored and prices are on a spot, or daily, basis. "Because this raw materials crisis is global, steel users around the world are experiencing similar increases in their steel costs," says David Sutherland, president of the American Iron and Steel Institute.

Supply shortages of raw materials are so acute that China, the largest steel manufacturer in the world, announced it would tighten export quotas on coke. Korea, number five in production, suspended exports of scrap iron and steel bar.

Another cyclical issue affecting the current price of steel and iron is the high price of scrap steel. Steel is the most recycled of all materials, with an entire class of newer steel companies depending on scrap as their primary input. Scrap prices are twice as high today as they were at the same time in 2003.

Global demand for steel, especially in China, is on the increase and will continue to increase. To make matters worse, many U.S. steel mills went bankrupt after steel prices plummeted from historic highs in the mid-1990s.

Steel prices are predicted to drop by fall 2004. But with rising global demand, prices are expected to increase over the next decade.

How this will affect farm machinery prices is still uncertain. "But don't expect them to go down," warns Dan Fanger of Unverferth Manufacturing. "We have had to absorb 30% to 40% increases in steel prices already."

Download a PDF file of the Machinery Digest section from the April 2004 issue of Successful Farming

Try as they might, machinery manufacturers will find it difficult to keep a lid on implement prices this year.

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