Wednesday, November 05, 2008

European Steel Prices, and why the producers must act.

Early 2008 witnessed record steel price increases across the world. Companies were recording and forecasting profits unknown in the steel industry for many years. The price increases were invariably attributed to the increasing costs of raw materials including iron ore, coking coal, gas, electricity and oil.

The steelmakers naturally took advantage of high demand levels to not only recover their cost increases, but to substantially increase margins. Strong balance sheets and profit forecasts made them for a short while, the “golden boys” of the stock markets, with rising share values and profit forecasts.

With a new found vigour, they took advantage of short term market conditions to continue putting up prices to the detriment of many of their customers who were struggling for survival. A lot of their customers in the automotive industry were “tied in” to annual pricing contracts with the car makers, with no prospect of recovering raw material increases. The steelmakers never saw this as “their” problem, even as European component producers started to hit serious financial problems and eventually failure. It was irresponsible of the steelmakers and showed a total lack of feeling for their established customer base, an attitude which might just come back to haunt them.

Then the recession hit and the cost of raw materials that were originally quoted as the basis for steel price increases started to tumble. Instead of passing on some of those savings to their customers the European steel manufacturers responded by reducing production, not only sufficiently to align supply more closely to demand, but to protect the high pricing levels that they had secured during the year.

Now whether or not they like it, steel prices around the world are falling, and they cannot any longer rely on the loyalty of the customers who they dealt with so shoddily in 2008. Whilst their raw material costs have “tumbled” in the past two months (check out scrap prices), they steadfastly continue to maintain their pricing structure, which cannot any longer be justified.

Steel buyers in the UK are pushing their suppliers (the Service centres, stockholders and re-rollers) for price decreases as they see evidence of international price falls. The European steel producers continue to resist. Offers are beginning to appear from outside Europe of steel at prices that will prove attractive to the distributors, who themselves are having serious financial problems. In a market with low demand and price pressure, deals are going to be made with steel producers outside of Europe and new supply relationships formed. The European producers are going to lose major customers, and it is much harder to find new business than to hold on to existing markets.

Its time for a price reduction to help stimulate manufacturing, and our EU producers should reduce prices now. If not then component manufacturers in other parts of the world, that benefit from lower local raw material costs will start to take business (particularly in the global auto industry) from our own producers. The long term prospects of this trend will be a shrinking European manufacturing base, and a shrinking market for our steel producers.

There is certain arrogance about the Steel producers in Europe that is likely to be their downfall, and there will be many steel consumers within Europe that will not be shedding any tears for them.

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