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Analyzing the Price of Hot-Rolled Sheet Steel

Sidebar to "The State of Steel"

Economists emphasize that buyers respond to changes in the market conditions they face. In particular, buyers have some degree of sensitivity to changes in the price of steel, to changes in the prices of substitutes for steel, and to the demand for the products they produce. We will examine a specific steel product, hot-rolled sheet steel (HRS), a carbon steel product that accounts for nearly 20 percent of U.S. steel production.

By 2000 (inflation-adjusted using the Producer Price Index for all commodities), hot-rolled sheet steel prices for domestically-produced steel in the U.S. were around $250 per ton, their lowest level since the beginning of the data series we are using (see Figure 5). By February 2003, prices had increased to about $263 per ton.

If we compared the prices of domestic and imported hot-rolled sheet, we would want to ask two questions. First, if prices charged by domestic producers increase and nothing else important changes (including prices of imported steel), by how much would we expect sales by domestic producers to fall? Second, if the price of imported steel rises and nothing else important changes (including the price of domestically-produced steel), by how much would domestic-producer sales rise?

In order to answer these questions, we need to have an estimate of the demand for hot-rolled sheet steel. In a recent study, we estimated what that demand looks like using a log-linear model. The results of this analysis suggest that a 1 percent increase in the price charged by domestic producers will lead to reduction in domestic-producer sales of 0.69 percent and that a 1 percent increase in the price of imported hot-rolled sheet will lead to an increase in sales of domestically-produced steel of 0.41 percent. Thus, domestically-produced and imported hot-rolled sheet are very good substitutes for each other, so buyers respond in a comparable manner to a change in either price.

If prices of imported steel increase, then domestic producers have two alternatives. They can maintain their current prices and capture additional market share. This would allow them to increase capacity utilization and take advantage of any lowering of average costs associated with more intensive capacity utilization. Or instead, they can increase their prices, thus increasing their profit margins and their short-run profitability. Doing this foregoes an increased market share.

Buyers of hot-rolled sheet also significantly increase their purchases when industrial production increases. The demand estimate tells us that a 1 percent increase in industrial production leads to a 0.86 percent increase in sales of steel (holding steel prices unchanged). These estimates can become important in considering long-run output growth as industrial production changes and short-run policy options, such as import tariffs.