In the Wall Street Journal article titled, “Industry Cuts Back As Steel Prices Fall,” writer Robert Guy Matthews discusses recent changes in the price of steel in the U.S. He also discusses past and potential future influences on U.S. steel prices. These influences include the domestic supply and demand of steel as well as foreign supply and demand in the global market. Supply and demand have been mainly shaped by the recession at large.
In the month of June, 2010, U.S. steel prices fell despite stable prices for several previous months. Steel producers are now responding to the price drop by cutting back on production. Matthews notes that U.S. steel mills had increased their production earlier in the year because they had anticipated an increase in demand during the economic recovery. U.S. steel mills were operating at about 72% capacity in June, which was an increase of eight percentage points from the beginning of the year. Consumers have not been quick to purchase expensive goods that are made from steel, such as automobiles and appliances.
Analysts believe prices could drop even further in July in addition to forecasting continuing low demand for steel. Despite lower steel prices, steel buyers might not be able to benefit because large steel consumers use annual or biannual contracts with fixed prices. Steel buyers are also waiting to buy steel because they think that prices will drop further before August, when demand tends to increase at the end of summer.
The picture in China during the recession had been quite different than in the U.S., as demand for steel to build cars, bridges, and appliances helped prop up global steel prices. However, demand in China has slowed and brought fears of China exporting cheap steel into the U.S market. While the U.S. has restrictive quotas on Chinese steel products, they are seen as relatively ineffective by steel consultant Michelle Applebaum. The U.S. steel market is somewhat insulated from the global market because of the availability of steel’s raw materials and the high cost of shipping across oceans. Imported steel still supplies about 20% of domestic steel consumption and steel imports grew 4% in May. Overall, global steel prices have fallen at a slightly greater rate than U.S. steel prices in recent months. Falling steel prices have also caused global spot prices of iron ore, a main input of steel, to decline 6% in May.
To understand the underlying mechanics of fluctuations in the price of steel, one needs a basic understanding of the concepts of supply and demand. Demand, which is mentioned in the article, refers to the quantity of goods that consumers will buy over a span of potential prices. As the price decreases, the quantity demanded by consumers increases. In a graphical representation, the demand curve is a line that slopes downward. Supply is not mentioned explicitly in the article, but it can be defined as the quantity of goods that companies are willing...