Tuesday, August 22, 2006

MEP's EU all carbon price composite at "all time high"

In view of the recent spate of price increase announcements, its interesting to see MEPS latest take on the situation.

EU steel prices showed a remarkably strong recovery over the first half of this year. Despite the Summer slowdown, the latest figures are now in some cases above the peak values reached in the previous cycle.

This is an important development. The uprush in steel prices in 2004 ran at an unprecedented pace and intensity. Between September 2003 and December 2004, average European steel values increased by a dramatic 91 percent in US dollar terms. In Euro terms (because of the currency’s appreciation against the dollar) the escalation was 62 percent - still an impressive rise.

There was, at that time, a global shortage of steel – something that had not been seen for many decades. Such high steel prices were widely considered as a one-off. No-one then would have predicted that within two years values would be back at these record levels.

The “stronger-for-longer” theory seems to be becoming a reality. Also called the “supercycle”, this is the idea that traditional commodity market cycles lasting a few years are being superseded by a lengthier period of general economic growth that will keep prices for steel and other metals at higher-than-historical levels – perhaps for a decade or longer.

The MEPS Composite All Products Carbon Steel Price, expressed in Euros, has already surpassed the previous peak. In October 2004 the figure stood at €556 per tonne. That level was matched in July 2006 when it reached €562 per tonne.

MEPS forecasts that the price will rise further to €581 per tonne in October. We expect the increases announced by some mills for the fourth quarter to be at least partially successful, though the producers may not get all they want. We also think prices will weaken slightly through the final quarter of this year and into 2007.

The MEPS latest EU - Composite All Products Carbon Steel Price Forecast (in US dollar terms), for September will match the 2004 apex. In October, that figure could well be exceeded.

Our analysis shows some differences in the price trajectories of flat and long products. The MEPS average transaction price for flat products last month was €606 per tonne – slightly higher than the previous peak of €602 in January 2005. The increase from June to July this year was around 2 percent, largely because of higher extras on galvanized sheet, as producers attempted to pass through their escalating zinc costs.

In long products, the last pinnacle was €499 per tonne reached in September 2004. This has not yet been exceeded in the current cycle: the MEPS July average transaction price for long products was €495 per tonne. But we forecast this will rise to €507 per tonne in October, before declining as construction activity undergoes its seasonal slowdown.

Source: MEPS - European Steel Review

The effect of the large growth in world steel output and the decline in internal demand in China, has clearly yet to impact on prices. I am unsure how long the escalation in prices can continue. It will be interesting to see what levels are negotiated by the “tier one” automotive suppliers for their 2007 prices. These negotiations are traditionally concluded toward the end of the last quarter.

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