Thursday, December 11, 2008

European Steel Market Chaos- MEPS report

 Meps are reporting on the dire situation in the European steel market

We are witnessing unprecedented steel market conditions. As mill order books collapsed, the steel makers were left with substantial amounts of part and fully-finished products. Consequently, there have been very few forward orders and most deals in the last two months have been supplied from producers' ex stock material.

Producers continue to impose swingeing output cuts in the face of this extraordinary downturn in real consumption and a massive destocking programme by customers. It is likely to be some time in the first half of 2009 before these measures bring the market back into balance and put a floor under ever-decreasing prices. The weak sales are tipped to worsen as the traditionally slow Christmas/New Year period fast approaches. Meanwhile, the steelmakers appear to be delaying any price decisions for the first quarter 2009 as long as possible.

Order intake at German mills is described as "disastrous". End-users are postponing or cancelling business. Service centres still have too much stock and are refusing to purchase until they have exhausted their inventories. Resale values fluctuate wildly. Third country import offers for January/February shipments are very competitive. However, there is little interest from buyers. Domestic producers are hesitating to reduce forward prices for period one, to figures that clients consider fair. For now, orders are being placed for early January supply at values to be agreed later.

French demand is weak as companies look to decrease their stocks. The mills have suffered numerous withdrawals of orders, particularly from the auto sector and distributors. Any market recovery is unlikely until at least the second quarter of 2009. Certainly, recent production curbs have had no impact so far. Spot prices continue to decline and may go down further until the end of the year. There have been some negotiations for the first trimester involving what producers describe as "more reasonable" price levels i.e. between €50 and €100 per tonne above those tabled. However, no deals have been closed as yet. This is creating some confusion in the market. Stockholders inventories have been coming down but still remain relatively high, even though some may lack products in specific dimensions. This could cause bottlenecks when buyers start to order again for January deliveries.

In Italy, local mills have lowered prices once again in order to combat competitive offers from third country importers. However, very few transactions are actually taking place. Because of this, prices are difficult to assess. Many manufacturing plants are closing from mid December to mid January because of a lack of demand for their products. This began with the hard hit auto sector and has now spread to other industries. Steel suppliers are trying to counterbalance this reduced consumption by implementing big output cuts. The destocking that remains necessary before companies begin to reorder is not happening because sales are virtually zero.

The weakness of sterling against the US dollar and the euro has reduced the inflow of imports into the UK. Domestic mill prices for forward orders are rather notional at the moment as relatively high stocks are preventing distributors from reordering. Spot values continue to tumble. Competition at the service centre level is fierce and resale prices are declining fast for most products, although some grades/sizes are stronger because of a lack of availability. Consumption is weak. The severe restrictions being imposed by the credit insurance sector are adversely impacting business activity, with everyone in the supply chain being affected.

The decline in market conditions in Belgium is quoted as "very fast and very aggressive". Prices are still being marked down. Many end-users are cancelling steel orders as their own customers withdraw contracted business. Distributors have plenty of material, probably enough to see them through period one 2009. Resale values are very cheap. Spanish demand remains low as stocks stay stubbornly high. Mills report cancellations of existing orders. In general, inventories at distributors are adequate for present sales levels but some holes are appearing for particular sizes/specifications.

We would concur with MEPS view on the current state of the market. It's amazing that whilst spot prices are collapsing, the European steel producers are largely refusing to quote discounts on prices even for the first quarter on forward orders. We even know of instances when mills are asking for substantial increases, that are unsustainable in this current market. We wrote back in early  November that they must act on prices, and they are still prevaricating.

Original MEPS article

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