The Steel Industry, a Tale of Two Parts

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Ferrous Metals, Supply & Demand

The steel industry appears to be a tale of two halves. On the one hand we are told China is booming; the steel industry there is running at near capacity according to the WSJ. Certainly our own MetalMiner IndX(SM) has tracked China prices increasing by over 10% since a low in April and some other Asian mills have also been running three shifts to meet increased demand in the second quarter as Reuters reported. On the other hand, mills in Europe and North America are operating at way below capacity even after extensive idling of facilities. Integrated steel mills like US Steel need to operate at about 75% of their full production capacity to break even. Electric arc furnaces like Nucor’s need to operate at about 60% according to the article. In the US, utilization rates are averaging 48% and in Europe 52%.

Globally the steel industry is facing about 300 million to 400 million tons of excess capacity, Alexei Mordashov, chief executive of OAO Severstal, Russia’s largest steelmaker is quoted as saying. The problem may lie with where the steel making capacity is located. Prices are rising in China and capacity is close to being fully utilized. As we covered in a previous article, Chinese steel mill prices are higher than Russian and East European mills. China is currently a net importer. In the US, prices are just showing their first up ticks and the ever positive Mr DiMicco recently said at a conference that demand has increased in recent weeks. But how strong a recovery in prices remains to be seen.  In Europe, where the economy has contracted even more than the US, Thyssen has announced they are to make a tentative price increase of Euros 25/ton from July 1 according to a Reuters report with possibly more increases from mid August onwards. What is not clear is whether end-users are buying any more and if the price increases will stick. Is the slight increase in demand really a reflection of greater end-user demand or just the supply chain beginning to re-stock?

Either way the great risk is that tentative signs of recovery in the west coupled with a strong second quarter in Asia encourages idled capacity back on stream. Sales in China are already showing signs of easing this month and the effects of the Chinese stimulus package will lesson as the year end approaches. It wouldn’t take much for the previous cuts to be swamped by more metal coming onto the market and demand faltering. As the WSJ commented, take Chinese demand out of the equation and prices could resume their slide. A double dip in steel prices is the last thing western steel producers need this year.

–Stuart Burns

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