Monday, August 24, 2009

Steel Prices, Meps latest EU forecast

MEPS have published the following forecast

After peaking in August 2008 at €860 per tonne, the MEPS EU average flat products' price collapsed to €420 per tonne in May this year. This was the lowest figure for more than five years.
The weakening economic climate pushed end-user demand to extremely low levels. Distributors and steel processing companies were forced to reduce inventories. Weak market conditions led to continuous reductions in steel prices into the second quarter of this year.
The steel mills' reaction to the poor demand was to cut output significantly. Steel making capacity utilisation rates fell to approximately 53 percent in the first half of this year. These massive production curbs restricted supply and made a significant contribution to the bottoming out of steel prices over the last two months, limiting the prospects for recovery in the future.
Stock reduction is now almost complete in the flat products segment. Customers ordered larger volumes in recent months from domestic producers as they looked to fill gaps in their inventories. This helped steelmakers to push through modest advances in transaction values for strip mill products.
The price recovery is forecast to continue in the short term for all steel categories. Distributors are expected to resume their restocking efforts after the summer period and scrap costs could move higher. Customers will, almost certainly, increase order volumes in an effort to buy ahead of further perceived advances.
There are still downside risks to steel prices during the remainder of 2009 because end-user consumption is likely to stay low. Industrial production is predicted to decline by approximately 15 percent, year-on-year. European mills have also started to ramp up output on the back of rising sales. Steel making capacity utilisation rates moved up to above 60 percent in June. However, oversupply could develop if the producers increase activity too quickly. These factors may limit price advances in the fourth quarter.
Consumer confidence is expected to improve as economies in the region emerge from recession in the coming months. Underlying demand for steel related goods should grow. Credit restrictions are also likely to ease with banks becoming less risk averse. This will help to increase the amount of finance that is available to companies of all sizes. Consequently, buying power could improve as 2010 progresses.
The strengthening economic situation is likely to encourage further inventory replenishment by service centres and end-users during the first half of next year. This should help local steelmakers to push through price advances early in 2010. Consequently, mills are expected to lift production and return to profitability in this period.
Despite a predicted revival in steel selling figures in the New Year, the market will, almost certainly, be slow to recover. Consequently, we do not envisage a return to previous price levels during our forecast period.

We would largely concur with these forecasts and we have seen many reports recently of steelmakers bringing production “online” to facilitate orders as destocking ends and new orders are placed to replenish.

There does not seem however to be any marked increase in demand. Whilst the restricting of production has no doubt contributed to the halting and even reversing of the downward trend in steel prices, increased production in the third quarter, does carry a risk of placing prices under pressure again toward the end of the year, unless demand accelerates.

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