The situation during 2005 is far removed from the optimism of last year, where prices increased significantly and a sellers market dominated. It is difficult to fully understand the phenomena, which nevertheless lead to overstocking and high inventory levels at end user and service centre plants.
Whilst the steelmakers started 2005 optimistically it was quite clear as early as January that things were changing. Even as further price increases were being announced for the second quarter, sales activity was significantly lower and “spot” prices were falling.
Faced with reduced demand many steelmakers started to reduce capacity to “protect” price levels. There are problems associated with this option. Firstly it is in the nature of “continuous” operations like the manufacturing of steel that cost per ton, increases as production falls. As less steel is produced from a given plant, the variable costs reduce, but the fixed costs remain more or less the same, increasing the actual cost per ton. Secondly, the individual steelmakers do not operate in a closed market, and unless they all reduce capacity they can soon see orders moving to competitors around the world who will “sell off” excess capacity cheaply away from their core market.
Recent News items reflect the difficult times:-
Times getting tougher for steel
makers
Steelmaker Corus returned to profit last year,
but analysts expect half-year results on Thursday to show that conditions have
become a little tougher for the Anglo-Dutch group because of oversupply in the
sector.
That was highlighted earlier in the month when the world's largest
steelmaker, Mittal Steel, announced a slight dip in second quarter profits after
prices softened and raw material costs rose.
Investors will hope Corus
shares the same viewpoint as Mittal's billionaire founder Lakshmi Mittal, as he
forecast a pick-up in prices following more pain in the third quarter of the
year.
In March, Corus posted profits for the first time since it was created
from the merger of British Steel and Hoogovens.
Business
Daily
China's Baosteel slashes steel prices by 10 percent as
market slows
Source: AFP
Steel ready for use on a Shanxi site. Baoshan
Iron and Steel Co (Baosteel), China's largest steelmaker, will slash by 10
percent prices on most steel products later this year, as
response to slowing demand.
The price cuts which follow earlier moves by
competitors, come as the Chinese steel market begins to wrestle with
signs of saturation, will take effect on October 1 on both hot and cold rolled steel, the Shanghai Daily said……
Metals Place
Steel Profits Melting Down
Steelmakers are warning their shareholders and the
investment community that results for the third quarter of this year are going
to reflect a much weaker landscape.
An Associated Press report notes
that U.S. Steel Co., Pittsburgh; Nucor Corp., Charlotte, N.C.; and
Netherlands-based Mittal Steel Co. have all issued warnings to institutional
investors to be ready for a drop-off in revenue and profits.
Red ink is
even being discussed, according to Wheeling Pittsburgh Steel Corp. President,
Harry Page, who tells AP, “The horse race at this time will be keeping selling
prices ahead of the cost of operations.”
The various warnings cite
pressures caused by lower prices and sluggish demand for their products while
the costs of making steel, including scrap and energy, have not necessarily
fallen in tandem.
The results will be in sharp contrast to the third
quarter of 2004, when some steelmakers reported profits at record or near-record
levels.
Many steelmakers have cut back production to try to fall in line
with slumping demand (and to minimize their losses), but thus far the production
cuts have not resulted in a pricing rebound for finished steel. The AP report
notes that just 23 blast furnaces were operating in the U.S. at one point this
summer, the fewest since a nationwide steelworkers’ strike in 1959.
Recycling
Today
Where does this leave us?
MEPS say in their latest forecast that despite cutbacks in Europe and the USA, continuing over production in Asia is ensuring that the market as a whole is still in an oversupply situation. They further predict that despite a small re-alignment in currency rates excess production in China will continue to keep prices down, and the situation is unlikely to change until the second quarter of 2006. It is ironic that huge demand for Steel in China, contributed significantly to the price increases of 2004!
I am inclined to “sit on the fence” on this one, but I won’t. There are rumours in the UK that Corus are looking to increase prices in quarter four, but I think it’s unlikely they will succeed. At the same time Indian mills have announced increases for the same period. I expect price levels to remain around current levels to the end of the year for most users.
No doubt I will be back here in a couple of weeks time reflecting on how I got it wrong!
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