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Lower raw material prices expected to delay steel price upturn

MEPS (International) : 04 September, 2012  (Special Report)
No significant increases in steel selling values for flat products are likely during the remainder of 2012, according to MEPS. Iron ore spot prices have started to decline as demand for the principal steel making raw material falters.

The economic crisis in the Eurozone has had a negative effect on steel demand for most of the year. Many banks have restricted lending patterns and credit limits have been reduced as they try to shore up their balance sheets.

Both construction and manufacturing companies are finding difficulties in funding inventories. Stockists and distributors are facing similar problems. Reduced stock levels through the supply chain have resulted in lower orders on the mills. Consequently, steelmakers are restricting their raw material purchases.

In China, the market is seriously oversupplied. Steel stocks in the country, so far in 2012, are substantially above those in previous years. Furthermore, steel production in the first seven months of the year increased by just 2.1 percent. In the same period, iron ore imports expanded by 9 percent. There is little prospect of any significant rise in steel demand in the latter months of the year.

Many other Asian mills have been restricting steel output and will continue to do so for the remainder of 2102. According to MEPS research, spot prices for iron ore fines delivered to Chinese ports (CFR) decreased in August by between 12.2 and 15.7 percent from major supplying countries. These reductions are directly the result of lower than anticipated requirements for the remainder of the year.

With minimal support for steel prices in the near term and little chance of an upturn in demand from any region in the world it is difficult to envisage any increases in raw material costs before the end of the year. It is widely expected that several mills in the European Union are contemplating reducing manned capacity in the near future. This is expected to further restrict demand for steelmaking raw materials.

Many steel producers across the world are operating at near, or below, break even point at current levels of activity. These units will also be considering production cuts by bringing forward maintenance plans or making temporary plant closures to avoid oversupply and the resultant negative price pressure.

What are the prospects for 2013? The most likely scenario in China is that the authorities will relax the bank lending criteria. They are also expected to increase government investment in infrastructure spending above current levels. An easing in the regulations on the real estate market is also a possibility. These actions should stimulate the steel market and avoid serious cut-backs in steel manufacturing next year. Steel prices should be revived somewhat.

Production cuts are anticipated in Europe in an effort to improve the supply-demand balance. MEPS anticipates both temporary and, perhaps, some permanent plant closures by the producers. This should lead to an upturn in steel selling prices in 2013.

Asian steel mills are expected to continue with modest output curbs in the near future. Consumption in most countries in the region is expected to expand. With equilibrium in steel supply and demand, selling values should rise next year.

Source: MEPS - International Steel Review

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