Friday, September 18, 2009

Rautaruukki CEO Says Steelmakers Face Slow Recovery From Slump

Sept. 18 (Bloomberg) -- Steelmakers face a slow recovery from the worst slump in demand since World War II as industry struggles to get funding for capital investment, according to Rautaruukki Oyj Chief Executive Officer Sakari Tamminen.

“The freefall has stopped and demand has leveled off at pretty low levels compared to where we were,” Tamminen, 55, said in an interview on Sept. 16 at the Helsinki headquarters of Finland’s biggest producer of carbon steel. “We need to be prepared for a slow recovery.”

Steel companies including ArcelorMittal, the world’s biggest, are resuming output at mills from the U.S. to Russia and China as economies recover and customers restock depleted inventories. Production in China, the largest maker, jumped 22 percent to a record in August from a year earlier as government spending spurred building and manufacturing demand.

Zhang Xiaogang, chairman of Angang Steel Co., China’s second-largest steelmaker by value, said on Aug. 19 that price gains may lead to oversupply and “cause market turmoil.”

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The steel industry would be wise to consider Mr. Tammimen’s words. We have recently seen sharp increases in spot prices for steel and announcements from steelmakers about fourth quarter price increases. The steel producers have begun to bring production back online in the face of a sharp increase in demand. If the steel manufacturers are interpreting this as the start of better times then I would question their judgement.

In reality we have seen a year of destocking at both manufacturers and service centres. Inevitably steel stocks have fell to levels that cannot sustain even a modest manufacturing activity. As a result steel is in short supply and end users and stockholders are placing orders to replenish stocks. In typical fashion the steel manufacturers become bullish, start increasing prices and talking as is the recession is over.

Real demand will not become apparent until stocks are back to a manageable level, probably by the end of this year. I am not the only one who fears that there is a danger of prices falling back at that time. I agree with Mr. Tammimen that real demand will only recover slowly, and that the seesaw approach taken by some steelmakers on pricing does nothing to encourage the recovery.

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