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Saturday, April 28, 2012

Downside in Steel Stocks Already Priced In
~~By Elliott Gue
An improvement in the outlook for global growth has helped drive a modest uptick in global steel prices and a similarly modest rally in the prices of global steel producing stocks.
But to truly understand the dynamics now driving the stock prices of steelmakers, investors must first understand the dynamics of making steel.
Steel isn’t a metal but an alloy that’s composed primarily of iron mixed with one or more additional elements that act as hardening agents, making steel far stronger than raw iron.
While the earliest steel artifacts are more than 4,000 years old, ancient production methods were inefficient and produced generally lower grades of steel than are possible today. Steel also was extremely expensive to manufacture and used only in applications where no cheaper alternative existed, such as in the production of swords and cutting tools.
However, a series of technological advancements starting in the mid-19th century turned steel from a niche alloy into a mass-produced industrial product that’s now one of the world’s most important basic materials.
In 2011 alone, the world produced around 1.5 billion metric tons (3.3 trillion pounds) of steel destined for a long list of end uses including residential and commercial construction, automobiles, appliances, energy and industrial machinery.
About 98% of all steel produced globally is manufactured using one of two basic processes: oxygen blown and electric furnaces. The main raw material used in an oxygen blown furnace is pig iron, a type of iron that has 2% to 4% carbon content.
Pig iron is created in what’s known as a blast furnace. In a blast furnace, raw iron ore, consisting primarily of iron mixed with oxygen, is heated to extreme temperatures in the presence of carbon in the form of coke, typically produced from metallurgical coal. The carbon combines with oxygen in the iron ore, to produce carbon dioxide gas, effectively removing the oxygen from the ore. The resultant product is pig iron, a rather brittle and useless substance in its own right.
To create steel from pig iron, much of the carbon and impurities must be removed. In an oxygen furnace, purified oxygen is pumped through molten pig iron. Oxygen bonds with carbon, to produce carbon monoxide, and with other impurities to produce slag that can be removed from the molten metal.
The result is steel, a low carbon and low impurity form of iron. The resultant steel can be alloyed with metals such as tungsten, chromium, molybdenum, and nickel to produce a product with various useful properties such as increased strength, lower weight or resistance to rusting.
In contrast, an electric arc furnace essentially uses electricity to heat scrap steel metal, remove impurities and make steel. Producing steel out of such a furnace is cheaper but requires availability of significant quantities of scrap steel to use as feedstock, so it’s a far more common technology in developed countries such as the US than fast-growing steel consumers such as China.
Worldwide, 70% of steel produced is made in oxygen blown furnaces compared to roughly 30% in electric arc furnaces. In Asia, the world’s most important steel-producing region, around 81% of steel production comes from oxygen blown furnaces. In China, the world’s largest steel-producing country accounting for nearly half of global production, more than 90% of steel is produced in oxygen blown furnaces.
By contrast, more developed regions such as the US and European Union are more heavily reliant on electric arc technology, with 61% and 44% of steel production respectively made using this technology.
Last year wasn’t kind to steel-producing firms or to steel prices generally--global steel producers saw gains of more than 100% in 2009 and 2010, followed by a near 34% pullback in 2011.
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