U.S. ECONOMY Higher steel prices to raise cost of many items we buy

The steel shortage is expected to raise consumer prices substantially.
KNIGHT RIDDER NEWSPAPERS
MIAMI -- Steel is increasingly becoming a precious metal in the American economy, and it's only a matter of time before the average household starts to pay the price in terms of higher prices for cars, appliances and new condominiums.
Thanks to a ravenous appetite for steel in fast-developing China, a rebounding U.S. economy and a weak dollar, steel prices are rocketing upward and supplies are short.
The trend is only 2 months old, but experts say it looks to be long-lasting.
"Ultimately, it will have a substantial inflationary effect," said Tom Danjczek, head of the Steel Manufacturers Association, which represents the so-called minimills that produce half the country's steel.
"Things like higher costs for roads and buildings. And 20 percent of our business goes to automobiles."
Although it is difficult to say how much, if any, of higher steel prices will make their way to retail sales, the cost could be substantial. For instance, a 2002 study by the American Iron and Steel Institute estimated that steel contributed $675 to the price of a $25,000 car. So if that were to double, the expense would rise to $1,350.
High scrap cost
Danjczek said the biggest problem is soaring prices for scrap metal. Scrap is melted down and then used by minimills, which produce roughly 50 million of the 100 million tons of steel made in the United States each year.
Scrap was selling for about $100 to $120 per ton at the end of 2003, he said. "In January it went to $210, and it looks like it will be up another $50-$60 in February."
Why? "Exports of scrap are up more than 60 percent from two years ago."
Most of the scrap is going to China, he said. Furthermore, steel mills in Asia that might once have shipped scrap to North America are now diverting it to the world's most populous country instead.
Complicating matters is the weak dollar. It means that even if foreign supplies can be located, they're much more expensive to purchase. America's growing trade with China has also prodded trans-Pacific freight rates upward.
"We don't see prices coming down soon," said Joe Carrero, vice president of Intermetal, a Miami broker of steel rebar, used in construction. "In fact, I think it will get worse. It's just a tough market right now."
What backfired
Although steel is a notoriously cyclical product when it comes to prices, the current rush upward is somewhat surprising in that it is occurring at a time of virtually zero inflation.
Furthermore, when the Bush administration recently lifted tariffs on imported steel, it was expected to send prices down as the country was flooded with cheap imports.
It hasn't worked that way. In fact, there is some industry buzz about fending off China by pushing for quotas on scrap exports, as several countries in Europe are considering.
But some experts believe that would be a mistake -- because it's strong economic growth that is the real culprit.
"Chinese imports were up last year, but not more than two years ago," said Charles Bradford, a New York steel analyst.
Still, he acknowledges the price squeeze is real. Besides the minimills that depend on scrap, so-called integrated mills that make steel from raw materials are suffering from shortages of iron ore and a coal-based fuel called coke.