No one would argue that the steel industry has had anything other than a tough time the last 9 months. This time last year the market was looking shaky but producers were still getting near record prices and talking of higher prices for September/October. In reality, that never happened and prices, along with demand, dropped like a stone in the late third and fourth quarters of 2008. Interestingly now mills are again going through a mini downturn as price rises that were pushed through in the second quarter came unstuck and are dropping off about 8% in September according to the Wall Street Journal.
Europe seems to be in much the same boat. Major German distributor Klockner & Co is quoted as saying real demand is still slow and the rise in sales seen in the second quarter is largely going to fill very depleted inventories; it does not represent a real rise in end user demand.
Emerging markets are showing mixed signals, China’s steel production is up but largely on the back of domestic consumption for autos, home appliances and capital investment. Exports are still weak. In July, China alone produced nearly half the world’s steel at 50 million tons according to steelonthenet.com. A Dow Jones report referenced in SteelGuru says Brazil is exporting twice the volume in July as it was doing in early 2009. Most of this is slabs and billets bound for China which took 85% of Brazil’s exports. US imports are up by 14.2% from June to July but still down 66.2% from 2008 to 2009 for the same period according to the AIIS – American Institute for International Steel. Exports are similarly up by 12.4% aided by a weak dollar. Imports still exceed exports by just under 6m tons year to date although the fall in imports at 49% has been greater than the fall in exports at 39%. Even so, although net imports are only about 8% of apparent steel consumption according to the USGS this is still enough to materially impact prices, good news for domestic consumers if not for domestic producers. The biggest issue is when steel demand will begin to pick up and while producers make bullish sounds the reality is its going to happen slowly. Falling freight and iron ore prices are helping producers who buy on the spot market but most domestic steel mills are either scrap based mini mills or are integrated steel mills which tend to buy on longer term contracts. So producers will continue to be under margin pressure for some time to come. They came under criticism from the AIIS for panicking and cutting production capacity too quickly at the turn of the year resulting in consumers sucking in imports to meet the slight surge in re-stocking demand in the early summer. In reality, the mills had no choice, with capacity utilization rates down to 45% in some cases continuing to produce steel was not an option. The danger is more that they will bring capacity back on stream too fast and create a double dip in prices, a situation some fear may already be on the cards.