I have been thinking more about the MEPS report on falling steel prices, which I reported here last Thursday.
It may or may not be generally known, but the large “tier one” automotive manufacturers and a few other big steel users manage to avoid the wildest fluctuations in steel prices by having them “fixed” for anything up to 18 months. Many of these large consumers will have had the power to resist the large increases of 2004 by having contractual price agreements.
Moving forward to 2005, how difficult is it going to be for the steel producers to convince their major customers who avoided last years substantial price levies that they must play “catch-up” on previous price rises? As demand is falling will they have the strength of their convictions to resist the inevitable pressure that will be brought to bear on prices, when volumes are falling?
It is clear from reports over the past few months that the steel producers are prepared to restrict production to help protect prices. However in any “continuous” operation like steelmaking, there are cost gains to be made by working close to maximum capacity. The reverse side of the coin are the cost penalties incurred working at low capacity, as “fixed costs” start to represent a greater proportion of the overall structure. At what point the producers start to become nervous can only be speculated upon, because cutting capacity will only work for a while. It is unlikely that the demand from China can be relied upon to provide volume sales away from their domestic market this year. Indeed it may not be too long before Chinese exports add to their woes.
One thing about being in this game a long time (oh alright, being an “owd bugger”) is that I have seen it all before, and I’m starting to get a feeling of Déja Vu.