As the largest steel producer in the world, ArcelorMittal has recently announced cuts of 30% or more in the 4th quarter. Meanwhile, consumers such as the automotive market are experiencing a drop in sales in the order of 30-45%. With such a dramatic change in demand in such a short time frame you have to wonder where will the price of steel go? To have driven ArcelorMittal to production cuts below 65% utilization, the drop-off in demand must be dire not just for Arcelor but for every steel producer.
Buyers across the board have stepped back from the market either because their own sales have dropped or because they can see the price coming down and do not want to be left holding high priced inventory. Western steel mills are not alone in this thinking. In China, many small to medium sized mills have closed shop entirely as the government has sought to shield the large state owned steel mills against the worst of the decline in demand. The Chinese economy grew at only 9% in the 3rd quarter and the 4th is likely to be significantly lower. For an economy used to 12-15% annual growth and subsequent steel growth, that is like a recession. Many of these mills that have closed are no more than a year or two old. Western producers, however, are hoping the trend will continue ” if Chinese mills keep rolling and try to export their way out of trouble they will devastate the world market price. China is already the world’s largest exporter of steel.
Fortunately perhaps for the western mills, high iron ore contract prices and sizeable high priced inventories mean most Chinese mills would be losing even more money if they kept producing as opposed to just shutting their doors. Tomorrow we’ll cover some specifics as to where the market will go and include our own price benchmarks.