Why Are Wire Rod Prices Increasing?

Rapidly rising prices and unstable supply conditions are impacting global welding wire markets.

By David B. Eckert

Welding distributors and their weld wire manufacturing partners have entered a business cycle that is yielding rapidly rising raw material input costs, the potential for supply shortages, and changes in pricing for both domestic and imported welding wire. Despite the uncertain economic conditions of the U.S. market, which would normally yield lower prices when coupled with decreased demand, we are faced with higher prices and short supplies because of the dynamics of a global economy.

Recent articles have documented that steel wire rod prices increased 19 percent in 2007. Steel wire rod or “green rod” is the primary component of carbon-based solid welding wires used in MIG welding applications. While other types of steels also have upward cost pressures, this article is focused primarily on solid wire.

Welding wire manufacturers faced with these increases have little room to lower their conversion costs because wire rod makes up 65-80 percent of their product cost. Labor components are minor, while the capital intensive operations of welding wire mills have high fixed costs (overhead) to support production. Thus when rod prices rapidly increase, it is difficult to offset and fairly immediate in its impact in the market since demand in the market is inelastic.

North American Wire Rod Mills
Steel wire rod used in welding wire mills to produce solid welding wire primarily comes from a handful of sources in North America or can be purchased on the global market depending on market conditions. Other wire rod mills exist in North America, but there are few that produce welding grade rod.

Since 2004, the last time the industry saw rapidly rising prices and steel shortages, these mills have become savvier in controlling capacities during fluctuating demand periods, thus manipulating market prices. Their raw material input costs fluctuate with changes in raw steel prices; iron, coke and scrap are the major components. Iron ore producers are currently seeking 70 percent increases from the mills, and coking coal is also significantly up year over year. Recent increases in scrap prices have seen prices rise by greater than 30 percent because of foreign market demand for scrap due to high steel consumption rates in those markets.

While steel prices are highly dependent on global economic cycles, the North American market is dependent on new construction and the automotive industry to consume about 40% of the steel demand. Slowdowns in new housing starts resulting from the sub-prime mortgage crisis have dropped demand to a 16-year low. Demand for automobiles suffering from years of zero interest financing and reliance on gas guzzling SUVs has dropped precipitously with the oil reaching near the $100 per barrel level. Thus, demand for wire rod used in the manufacturing of everything from fasteners to concrete mesh has dropped, while at the same time the rod mills have reduced capacity in order to keep their pricing up.

Compared to China, which is spending 50 percent of its GDP on building fixed assets such as roads, rail, bridges and buildings, the North American market for steel is feeling the full impact of downturns in its critical steel consumption markets. China continues to be a net importer of steel and consumes 32 percent of the worldwide steel production. Russia, Ukraine, India and Brazil represent the low-cost steel producing countries due to the cost of energy in China, which more than offsets its low labor costs. However, government intervention has placed trade barriers on these markets blocking competition in the U.S. market. Punitive tariffs on carbon and alloy steel rod imports from seven nations—Brazil, Canada, Indonesia, Mexico, Moldova, Trinidad and Tobago and Ukraine—should stay on the books. The import duty case now goes to the U.S. International Trade Commission.

Foreign Markets
During 2006, domestic wire suppliers had the option of importing rod from foreign markets at considerably lower prices than domestic steel mills due to government rebate incentives in countries like China. Since then, these incentives have been replaced by taxes in an attempt to keep steel resources in China for internal purposes and reduce pressure from foreign governments resulting from unfair trade environments. While 2007 saw steel imports drop 50 percent over the prior year, recent import declines have reduced imports at a more aggressive rate, further reducing the supply of billets and wire rod in the market.

As capacity and demand have declined and traditionally lower-cost markets are increasing their prices, the North American market sits on a delicate balance. Unplanned shutdowns of key blast furnace capacity (Arcelor Mittal, Cleveland) result in reduced supply, while labor strife at Mexican plants takes out another piece of the supply chain, putting the market on edge and poised for difficult times. At the same time, any heat up of demand for wire rod may just be the tipping point which creates supply shortages and increased rod costs for welding wire manufacturers.

The Bad News
So what does all this mean to welding distribution? Well, in recent years, wire drawers have had difficulty in passing on pricing due to low-cost imports and the availability of capacity in the supply chain. Current market conditions would indicate that we are entering a period of escalating solid weld wire prices with first quarter 2008 increases heading for double-digit levels. Importers are struggling to maintain the 20-40 percent lower pricing with the retraction of unfair trade practices, higher raw material prices, increasing shipping costs and the very real prospect of supply constraints. Additionally, the weakness of the U.S. dollar has made it more expensive to sell to the United States.

Combine all of these factors together and U.S. weld wire manufacturing is facing the reality of higher prices and unstable supply conditions in 2008. While some manufacturers and importers may have hedged in the short run, allowing them to delay or claim price stability, eventually all will be faced with passing on the impact of this latest cycle.