Dow Jones Steel Market Analysis

Steel Market Analysis
by Gianclaudio Torlizzi The steel market continues to be torn between two countervailing forces accelerating raw material costs versus sluggish demand in industrial countries. Exploding raw material costs have provided the basis for double-digit percentage increases of steel prices since the beginning of the year. So far, buyers have viewed higher list prices as temporary and held off placing orders, trusting that buying interest is too subdued to support higher steel prices over an extended period of time. There are still valid concerns regarding the extent of the revival of real demand in OECD countries, though stocks slowly dwindle. Fiscal jitters in several European countries and mixed macroeconomic indicators stall growth expectations. In addition, finished steel inventories pile up in China . Q2/10 will give more clarity on who will have the longer breath steel buyers who are still facing sluggish end-user demand in their industries, or steel makers, who struggle with tightening margins as their sell prices fail to rise as much as their cost curve. It might turn out that limited opportunities to import cheaper steel into Europe and high concentration in the steelmaking sector here will leave European buyers with no choice but to put more money on the table. In addition, steelmakers might scale down output again if margins get too tight. Our model suggests that European spot flat steel prices may rise another 5% by mid-Q2/10. In the nascent iron ore spot market, prices have climbed higher by 20% since the beginning of the year, and market players expect long-term benchmark prices to double on year as the global shortage of ore becomes more prevalent. Steelmakers are yet to see the full effect of leaps in input prices for both iron ore and coking coal as long term contracts have yet to come into effect. Long products will in our view also gain substantially as producers factor in scrap prices, which have climbed by more than 30% since the beginning of the year on the back of continuous supply bottlenecks and Chinese buying. Compared to the gains seen in these markets, this years increase in steel prices looks moderate: Central European hot rolled coil prices were up by roughly 20%, suggesting that steel makers have not been able to fully pass on higher input costs onto the consumers. Equity analysts at Goldman Sachs recently warned of a long period of margin compression among European steelmakers. They said only half of the cost burden is already reflected in European spot steel prices. In effect, this would imply a sustained period of high steel prices well into Q3 and Q4/10 . Purchasers meanwhile cannot count on material from abroad. Lead times are long and material is expensive in other parts of the world. U.S. steel is supported by the strong US-dollar and therefore unattractive for European buyers. Material in Asia meanwhile costs just as much as in Europe, leaving virtually no room for European buyers to benefit from imports. At the Shanghai Futures Exchange (SHFE), prices moved up another 5-6% in the last two weeks, in addition to the substantial gains already seen this year. But the curve for both grades flattened out slightly, as contracts at the far end of the curve gained less than near-term deliveries. Vivid prompt buying suggests that players anticipate a demand revival and view the supply situation as less abundant than they did a few weeks back. This enforces the notion that there will be a dichotomy between emerging economies and industrial countries, the former leading the way in demand revival. Gianclaudio Torlizzi Dow Jones Financial Information Services via Burigozzo 5 20122 Milano Tel.: +39.02.58219919 Mobile: +39.347.67.69.186