Steel Production Up, Stocks Down

November 20, 2007: Production figures released by the International Iron and Steel Institute (IISI) shows that global output increased in September this year. Most regions registered stable or slightly reduced output, except for EU 27, which increased by 2 million tons compared with August.

Italy, France and Spain saw the most significant increases. China's output was steady at 41.5 million tons. This is essentially because Europe returned from its traditional summer slowdown.

Stock levels have reduced, as is being widely reported, and this looks set to continue till the first quarter of next year.

The following are some salient worldwide happenings in the steel markets:

• Prices in Asia have been higher from both international suppliers and Chinese mills, and new Chinese offers are still at high levels, due to the recent rise in export taxes.

• Southern European flat prices have been weaker, as September's higher demand has eased in October and is being met by increased local supply and continuing imports.

• Northern European flat prices have been mostly steady, as there have been no announced Q4 producer increases, though there are some reports of small discounts becoming available.

• Flat prices in the US have been firm during October. Only a part of the producers' official increases were achieved in September and the remainder of the $30 per short ton has now been generally accepted in October.

• Long products' demand is easing slightly in the US, and is even slower in Europe. Prices are weakening in all regions except Asia as the buyers are holding sufficient stocks and anticipating further price decreases.

• Imports from China have continued to arrive in Europe, but the quantities of material and new offers have slowed into Asia. Reports indicate that arrivals into Europe will also slow, while Eurofer launched an anti-dumping complaint against CR stainless steel and metallic coated coils, which includes most HDGalvanised coils.

The market is typically buoyant up to hot rolled coil and weakens as you add value further downstream. CR and HDG markets are weak and the plate markets have been consistently strong, especially ship plate.

The most important development in the industry is the rapid rise in the spot prices of its two most important raw materials like iron ore and coke. China's iron ore import prices have finally eased, amid reports of many small-scale steel mills halting production in the face of excessive raw materials prices.

Most small Chinese mills are affected as they pay high costs on the one hand and domestic prices are lower thanks to export taxes on finished steel products.

An iron ore trader in north China's Tianjin, a major port city for iron ore unloading, said that Indian offerings for 63.5 percent Fe content this week had eased to about $190 per ton cfr (cost and freight). Last week's confirmed prices were mostly in the range $190-195 per ton, but there were indications of prices as high as $202 per ton.

As many as 50 small steel mills around Tangshan, Hebei province, have stopped production altogether as spot iron ore prices made business unprofitable, traders said. Hebei has a large number of steel facilities employing blast furnaces of 300 cubic metres or smaller.

Apparently there has been no trading after the offerings declined, indicating that $190 per ton is still a bit high for most private steel mills, and demand has dwindled because of the temporary shutdowns.

China's spot iron ore fines prices have climbed 86 percent over the past three months, from $103 to $104 per ton cfr in the beginning of August.

Tangshan is China's major steel production base. Among the 35 million tons per annum of obsolete crude steel capacities to be chopped off this year, 10 million tons per annum is located in Tangshan.

The higher raw material prices will have a huge impact on steel companies that do not have control over their raw materials. Either way, the steel consumer would have to bear the brunt of higher finished steel prices. If steel prices are low, the high raw material costs will shut down steel mills making steel supply tighter, which will lead to stronger pricing.

If high raw material prices persist, then steel consumers need to brace themselves for much higher steel prices in 2008.

On the demand side, 2007 has been a year of de-stocking. Service centres and consumers have spent much of 2007 reducing inventory levels in the supply chain.

Credit Suisse forecast

Credit Suisse has forecast a steel supply deficit in 2008. They predict a supply deficit in finished steel products of up to 7.5 to 9.5 percent in the world market outside the US and China in 2008. It says this is due to a potential reduction in Chinese exports and an increase in US imports, as buyers in both countries restock.

Credit Suisse says that next year's higher stock levels in both countries are expected to result in the removal of some 48 to 60 million tons from the global export market. China's exports next year are forecast at 20 to 30 million tons, compared with around 60 million tons in 2007.

The real key to this anticipated shortage is the growth in infrastructure demand in many parts of the world. "Our analysis shows that the non-China, non-US market has seen apparent demand grow from 550 million tons in 1996 to 800 million tons in the last 12 months."

At the same time, it says most of the capacity addition since 1997 has been either "de-bottlenecking capacity creep or the revamping of some previously obsolete capacity in the former Soviet Union states." It estimates that this is the equivalent of only 100 million tons per annum.

The forecast also assumes, by definition, that both the US and Chinese markets remain tight.

Steel prices set to peak in Q2 2008, says HSBC

Global steel prices are set to peak in the second quarter of 2008, according to the latest forecast from steel analysts at HSBC, the Hong Kong & Shanghai Banking Corporation. They say this peak will be driven by higher iron ore prices, seasonally high demand for steel and the high taxes on steel products exported from China.

HSBC has forecast a 40 percent rise in iron ore prices in 2008, and says that the marginal cost of an exported ton of Chinese steel has recently increased by $150 per ton. Chinese steel has gone from being a "price threat" to being a market leader for price increases: it "has become so important in the supply chain that it is difficult to replace," it claims.

Thus in its report, "Global Steel Prices - the World Pays Chinese Taxes," it says that the current tax on the country's steel exports is set to be passed on, particularly in deficit areas such as South East Asia and the Middle East. Moreover, the lagged effect of the new taxes and the higher spot iron ore prices will "sharply reverse the Q3 downturn in steel prices," over the next three to six months.

However, the Q2 2008 peak will be followed a period of seasonal weakness in the second half of the year. This will be "accelerated by a progressive adjustment to the shortage of Chinese supplies and to the shortage of dry bulk shipping," it says. There will also be "a fall in long product prices relative to flat products," by around this time.

Indeed, steel prices will fall progressively until 2010 with "the fall in the price of iron ore and lower shipping charges." In addition, the report speaks of a build-up in capacity in South East Asia, making the area less dependent on Chinese material in 2009-11.

Source: Sourcing Insights