Examining The Past 100 Years: Where Is The Steel Super Cycle Headed?
AuthorJun H. Goh,Ji-Ho Yoo,Moon-Kee Kong
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Looking at long-run data of real steel prices over the last 100 years, high volatility in steel prices is not just a recent phenomenon. Steel prices had high volatility from a long time ago and repeated long-run cycles with ups and downs. Real steel prices had long downswings for about 25 years after the first oil shock in the early 1970s, and surged sharply in the 2000s. After a decline in 2010, steel prices began rising in 2016. Then where will steel prices go?
This article assumes that steel prices repeat long-run cycles throughout a long-run trend. If the long-run trend, long-run cycle, short-run cycle can be decomposed from steel price data, it would be helpful to verify this argument and forecast steel prices. In the 2000s, many experts recognized the existence of long-run cycles with upswings lasting from 10 to 35 years, and termed such cycle as a super cycle. In addition, with the development of a “band-pass filter,” it became possible to decompose a long-run trend, super cycle, and short-run cycle
from real data. In this article, this concept of a super cycle and the band-pass filter are applied to steel prices, giving important insight into the directions of steel prices.
This article analyzed US real HR price from 1900 to 2016, which for the first time included the latest data until 2016 unlike any other past studies on super cycles . According to this analysis, it turns out that the long-run trend peaked in the early 1970s and declined afterward. The super cycle, which is in its fourth cycle, peaked in 2011 and entered a downward phase. Decomposition of real steel prices suggests four super cycles (1928~1949, 1950~1972, 1973~1996, 1997~). The current fourth super cycle is attributed to rising steel demand driven
by China’s industrialization and urbanization (China effect) and supply lagging behind the sudden upsurge in demand. Being too optimistic about the prolonged upswings of the super cycle, the global steel industry made excessive investment in facilities. The fourth super cycle failed to maintain an upturn and turned downward prematurely. In the meantime, super cycles of other commodities, including iron ore, crude oil, copper, and aluminum, are quite similar to steel super cycles after 2000, because they share the same cause of a super cycle, the “China effect.”
Amid a prolonged low growth of the steel industry, the critical factor to shorten the super downtrend and downcycle is how fast excessive capacity can be reduced. It is also important how fast the economic growth of emerging markets, especially India and the ASEAN, will offset a steel demand slowdown in China.
Although the long-run trend and super cycles are in the downward phase, short-run business cycles have been volatile recently. This will continue for a while. Therefore, steelmakers should pay close attention to short-term business cycles rather than long-run cycles to keep cash flow steady and maximize profits.