Monday, May 18, 2009

MEPS steel price and demand forecast


The MEPS – Global World All Products Composite transaction price was, as anticipated, slightly lower in April. Global demand is weak for both long and flat products. Despite continued production curbs in all parts of the world, oversupply remains a problem. This is due to a substantial reduction in inventories in the supply chain over the past six months. However, it is now becoming clear that the rate of steel price decline is slowing. This is partly because the inventory drawdown is coming to an end. Further price reductions are anticipated over the next few months. The prospect of a significant cut in iron ore contract prices is leading to fears that prices will drop further.
An early revival in steel prices is unlikely. However, we do believe that a recovery is probable in the final quarter of the year and into 2010. The inventory depletion phase will be almost complete. Customers will need to start reordering on the mills. Delivery lead times are expected to extend. The mills will, almost certainly, maintain some production curbs. Moreover, the benefits of the various governments’ incentive packages should be filtering through to the steel sector as auto sales improve and infrastructure/construction projects start up.

The MEPS - EU All Products Composite transaction price decreased by approximately €30 per tonne in April. This was slightly below the figure anticipated last month. Competition from cheap dockside material forced local producers to reduce offer prices for flat products as they competed for the few orders available. Inventory depletion slowed with high stock levels for strip products remaining at many distributors. Decreases in scrap costs during March pushed down transaction values for all long categories. Consumption from end users was low. Mills continued to cut production in an attempt to re-balance supply and demand. With very few sales being concluded, however, this has yet to have any real effect on steel prices. Export opportunities declined further. Both the commercial and residential building sectors continued to weaken. Even projects that were ongoing have now been put on hold because of a lack of finance.
Selling figures should begin to stabilise in the second half of the year as domestic markets started showing small signs of recovery during the latter part of April. Recent rises in scrap costs could push long products prices higher after the summer break. However, there could still be downward pressure on transaction values as end user consumption will, almost certainly, remain weak in the short term. The conclusion of the new iron ore contract may also weaken transaction values for flat categories lower. Prices are then forecast to recover during the second half of 2009 as mills re-balance supply and demand by continuing to cut output and extending summer shut downs. The availability of credit should also improve later in the year. This is likely to lead to increased buying activity and accelerate the inventory depletion process. However, rises in selling figures may be limited by a resurgence in import volumes. Larger advances are forecast for early in 2010.


The MEPS – North American All Products Composite transaction price moved down by over 5 percent in April. This was in line with our March forecast. End user demand remained poor. Scrap costs pushed long categories lower this month. Customers are still buying on an “as needed” basis. Consequently, the producers order volumes were low. Distributors are fighting for sales in a bid to offload surplus stock and raise cash. Reduced operating rates are also putting pressure on mill production costs. Inventory depletion continued throughout the supply chain. However, the pace of de-stocking slowed at US service centres, with gaps beginning to appear for certain grades/sizes. These are, however, not being replaced. Import purchases are too risky due to the extended delivery lead times. The housing market is still facing difficult times ahead, despite a 22 percent rise in new start-ups in February.
The All Products Composite price is forecast to continue decreasing over the next few months, even though the steelmakers are operating close to, or under, the cost of production. Falling raw material values are likely to put additional downward pressure on selling figures as demand from end users remains low. However, we do believe that we are nearing the bottom of the current price cycle. Import volumes are dropping and local mills are expected to maintain production cuts and extend summer shut downs. We predict that transaction values will stabilise around the middle of the year.
Government stimulus packages should begin to lift steel demand during the second half of 2009. Credit restrictions are also likely to ease. This should provide customers with the ability to increase their purchases. Low inventory levels in the market could then create supply shortages as order volumes grow. This will, almost certainly, lead to extended delivery lead times and rising prices from the fourth quarter onwards. Seasonal factors may temper these advances initially. Larger gains are then predicted for early 2010.


The MEPS – Asian All Products Composite transaction price moved up marginally in April. However, domestic price decreases were noted in all countries except Japan. Exchange rate movements, particularly in the South Korean Won, pushed the figures upwards when converted into US dollars. Output in the auto, appliance and construction industry negatively affected the cold rolled and coated sectors this month. Decreases in raw material costs put negative pressure on long products transaction values. End user demand was weak. Sales to distributors were low due to ongoing inventory depletion. Consequently, the mills tried to increase exports to help boost their order books. Nevertheless, poor global demand made this a difficult task, even for Chinese traders who have had export tax rebates reinstated. Local steelmakers continued to cut production in a bid to stem oversupply across the region. Building developments are being cancelled or postponed due to weakening economic conditions.
Transaction values for all products are forecast to decrease over the next few months as few signs of a pick-up in end user demand are evident. Distributors are expected to continue de-stocking with no rebound in sales anticipated until the excess inventories have been digested. Negative price pressure is also likely once the new iron ore contracts have been concluded, with Posco having already promised to adjust steel selling figures after the negotiations are completed. Weakening scrap costs are predicted to push prices for long categories lower in the short term. However, the oversupply situation may begin to ease shortly. Many local mills are scaling back production and several steelmakers are choosing to carry out maintenance in the hope that this will help to re-balance the market. Some sales recovery for long products in China is predicted in May/June, when several large projects start up. The Shanghai-Hangzhou railway in particular should generate demand in the longer term. Price stability is predicted for the third quarter.
A steady increase in steel consumption is predicted for the second half of 2009 as government schemes get underway. Prices are, therefore, forecast to advance in the final few months of the year. However, oversupply in some categories could temper these rises as new capacity comes on stream in China. Larger price improvements are forecast for early 2010 as a recovery in the world economy commences.


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