Friday, October 16, 2009

European steel prices slipping?

We have argued for some time that recent price increases implemented by the steel producers were premature and counterproductive.

Shortages due to greatly reduced inventories which in themselves were the result of poor sales lead to end users and distributors placing new orders in June and July. It was naive in the extreme for the steel producers to interpret this as a sign of a real increase in demand. As a result production was increased and there is likely to be a glut of steel in warehouses with real demand still very low. Attempts to move these stocks is likely to put downward pressure on prices. Whilst some grades and sizes are still in short supply and demand price premiums, even this situation will ease very quickly as orders placed in the early summer are fulfilled.

The recent MEPS report supports our view:

The downward trend in steel prices, predicted by MEPS (International) Ltd. last month, has already begun for flat products in some European countries. Material has been in fairly short supply in recent months because producers have continued to restrict their output. Moreover, buyers have undertaken some stock replenishment, after paring back their inventories to minimum levels.
It was anticipated that the mills’ planned production increases would tilt the supply/ demand balance and halt the recent upward movement in prices. In fact, this has been exacerbated by the absence of any sign of a substantial improvement in end-user demand. The higher selling figures available have also attracted imports – particularly from Asia. Most flat steel products have become more readily available and values have started to fall in mainland Europe.
There are some exceptions. Holes in inventories have buoyed the price of galvanised steel in some countries. Furthermore, while plentiful supply has constrained commodity grade plate figures, it has been possible to achieve higher selling numbers for superior specification material.
MEPS’ research has found more optimism in the Nordic countries. Notwithstanding, it is not clear at this stage whether there is a pick-up in real consumption, or if it is an example of the region’s traditional lag behind the markets of Western and Southern Europe.
Demand for long products, too, has diminished after a brief period of restocking, and this will be aggravated by the seasonal downturn in construction activity. Small price increases for many products, at the beginning of October, were supported by earlier hikes in raw material values. However, scrap costs have since fallen and longs selling figures are destined to follow.



The World Steel Association is forecasting growth in steel demand in Europe of around 12% in 2010 (and interestingly up to 25% in the UK). This is against a background of a fall of some 40% in 2009.

I would be surprised to see growth significantly higher than this and treat the occasional rhetoric by steel producers “talking up demand” with caution.

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