APRIL SNAPSHOT
1. European strip mill product steel prices were largely unchanged, in late March/early April, despite the major impact of the coronavirus outbreak on the steel sector and the worldwide economy.
2. MEPS (MEPS International Ltd) notes a great deal of uncertainty. As major end-user industries, especially the auto sector, ground to a halt, purchasing activity slowed significantly.
3. European steelmakers are cutting output substantially in an attempt to balance supply with reduced demand. Currently, local mills are not using price as an instrument to encourage sales.
4. Negative pressure could come, as a result of cheap third country imports. A sharp reduction in offers from overseas is noted.
5. However, at present, buyers are only interested in purchasing small quantities for their immediate needs. They are unwilling to risk ordering material that will be delivered many months ahead, when future demand remains unquantifiable.
6. As the Covid-19 pandemic rampaged through Europe, the authorities in individual countries reacted to the threat in a variety of ways and at differing speeds.
7. Although the French government did not impose a total lockdown, many companies chose to close. Steel producers kept output at reduced levels or shut facilities.
8. However, workers are reluctant to return, especially in the logistics sector.
JUNE SNAPSHOT
1. The closure of manufacturing units, in China, resulted in supply chain issues being felt on all continents, across many steel-consuming sectors.
2. Output at global carmakers remains substantially below pre-pandemic levels, despite the easing of government-imposed restrictions in many countries. Demand from this segment is vital to many steel producers.
3. The revival in the steel market, in China, continues to gather pace, despite the onset of the rainy season. The pace of the recovery could give Chinese companies a head start when global consumers return to the market, after months of staying at home.
4. However, growing domestic demand, in China, is likely to absorb a lot of the increased output.
5. The mood in the EU steel market, in June, is one of cautious optimism. Demand is beginning to improve, albeit modestly, following the easing of lockdowns and coronavirus restrictions across the continent.
6. Activity, in steel-consuming sectors, is gradually coming back to life. Operating rates at many businesses had fallen below fifty percent, and even lower in numerous cases, during recent months. The construction industry is performing satisfactorily. The automotive manufacturers have been the worst hit and they continue to struggle.
7. Inventories, at distributors and service centres, are sufficient for current needs. Resale prices are likely to remain under negative pressure, in the near term, as many stockists offload excess material, in an attempt to generate cash flow.
8. However, this is resulting in pockets of stock shortages – particularly for customers who require large tonnages at short notice.
9. Many businesses are planning to make steel purchases in the next two to three months. Nevertheless, any increase in domestic mill sales volumes is expected to be restricted by the slow recovery in end-user activity.
10. Concern exists about the lack of new projects. Several European mills may take extended summer shutdowns, in order to tighten market supply and push steel transaction values upwards.
JUNE - IRON ORE BREAKS US$100/t
1. The rise in Chinese steel production, recently, contributed to the cost of iron ore moving above US$100 per tonne. This is exerting negative pressure on mill profit margins outside of China, where demand remains muted and steel prices weak.
2. Nevertheless, rising input expenditure could provide producers with the impetus to push through much-needed steel price hikes, in the coming months.
3. The recovery in the Chinese market could reveal the route out of the coronavirus-induced downturn in the global steel sector. The rest of the world is behind the curve.
4. Although the revival in other countries appears to be much slower, there are positive signs to take from the upturn in China. Steel prices are likely to remain volatile, in the second half of 2020, as the road to recovery is expected to be uneven.
5. The situation in the global market may get worse before it gets better. It took many years for the steel sector to regain most of the lost ground, following the 2008/9 financial crisis.
JUNE - INPUT COSTS RISE IN EUROPE
1. Raw material expenditure has risen, in the past month. This, coupled with weakening steel selling figures, is putting significant pressure on mill profit margins.
2. European steelmakers are likely to attempt cost-based price increases, in the third quarter. Consequently, MEPS predicts that transaction values are nearing the bottom of the current cycle.
3. Several European governments have announced stimulus measures, particularly for the automotive sector. However, these are targeted at electric vehicles which have low production and sales volumes, at present.
4. This will do little to boost steel shipments to car manufacturers, this year. Nevertheless, the cash injections into the economy will aid the overall EU steel market recovery.
5. Credit limits have been reduced, for many European companies. Although this is yet to create any significant problems in the market, it will restrict steel purchase volumes and could slow the revival, in the second half of 2020.
2020 Q4 PREDICTION
1. Steel prices are heading upwards in 2020 Q4. It has been a very challenging time for all participants in the steel supply chain. The coronavirus pandemic resulted in national governments imposing large-scale lockdowns.
2. Steel producers and distributors faced a slump in orders, as end-user activity was, in many cases, brought to a standstill. Steel prices fell, amid the downturn in demand. But the market could be about to turn a corner.
UNSUSTAINABLE MARGINS
1. Firstly, European mills cannot withstand such extremely weak financial positions for much longer. Steel producers faced deteriorating conditions throughout 2019.
2. The Covid-19 crisis has severely compounded these difficulties. Since the spring of this year, steel prices reduced and raw material costs increased, resulting in unsustainably low profit margins.
3. The mills need to lift spot market prices before negotiations commence for 2021 annual and half-yearly contracts.
4. Having a significant proportion of their order books locked in at the current low prices would likely cause irreparable damage to a number of steel producers, given their existing precarious financial situation.
RISING COSTS
1. The cost of steelmaking raw materials has increased dramatically since late March/early April. Iron ore prices have soared by 57 percent to reach a six-and-a-half-year peak at close to US$130 per tonne, amid record high Chinese steel production.
2. Increases were also substantial for the benchmark Turkish scrap import value – up 38 percent since the start of the second quarter. Scrap availability was disrupted by coronavirus-related lockdown measures. Meanwhile, purchasing by mills in Turkey was generally strong.
3. Reductions occurred in coking coal prices – down 25 percent in the equivalent time period, as supply outstripped demand. Nevertheless, this has done little to offset the surge in iron ore and ferrous scrap expenditure.
UNCOMPETITIBE IMPORTS
1. Thirdly, China’s insatiable appetite for raw materials and finished steel is lifting the prospects for a global steel price recovery. The country became a net steel importer in June, for the first time in more than eleven years, amid substantial fiscal spending and monetary easing.
2. China’s rapid, stimulus-fuelled recovery from the virus pandemic enabled major steel exporters, such as those in Russia and Turkey, to lift hot rolled coil values by around US$100 per tonne following the crash recorded in March/April.
3. The price revival in Europe is lagging that witnessed overseas. This is resulting in uncompetitive offers from third country suppliers, as they prefer to target more lucrative markets outside the EU.
TRADE PROTECTION
1. Another factor expected to influence the near-term steel price trend is trade protection measures. The European Commission implemented revised safeguard quotas on July 1, 2020. Consequently, import volumes from major suppliers, such as Turkey, Russia and India, are expected to reduce.
2. Moreover, antidumping and antisubsidy investigations are ongoing into Turkish-origin hot rolled coil. In addition, further trade action could be imposed by the European authorities, for example, an upward adjustment to Severstal’s €17.60 per tonne import duty.
3. The threat of paying tariffs and duties, and the added complexities to importing that the trade protection measures create, are expected to dissuade many steel buyers from purchasing material from overseas suppliers in the coming months.
TIGHTENING SUPPLY
1. Along with the likelihood of reduced import volumes, domestic supply is tightening. A substantial amount of capacity was taken out of the market in recent months.
2. European crude steel production fell by more than 25 percent, year-on-year, in the second quarter of 2020. As well as the coronavirus-related production cuts, many steelmakers are undertaking plant outages for traditional summer maintenance work.
3. A lag between demand returning and steel producers ramping up output at their furnaces and rolling mills is expected. This is demonstrated in the current, extending delivery lead times being offered by EU steelmakers.
RECOVERING DEMAND
1. The IHS Markit Eurozone Manufacturing PMI was 51.8 in July 2020. The last time the monthly index registered an expansion was in January 2019. The growth indicates that a recovery is underway in the manufacturing industry.
2. During the second quarter of this year, production at European vehicle makers was severely negatively affected by the Covid-19 lockdown measures.
3. As a consequence, steelmakers that rely heavily on the auto sector saw a dramatic drop in their order books. This forced EU mills to find alternative buyers for their steel products, at reduced selling prices.
4. An upturn in demand from automotive companies bodes well for an improvement in conditions in the steel sector and the prospects for steel price increases.
SOURCE:
https://worldsteelprices.com/2020/06/22/optimism-slowly-returning-to-the-eu-steel-market/
https://worldsteelprices.com/2020/08/25/6-reasons-why-european-steel-prices-will-rise-in-september/
https://worldsteelprices.com/2020/04/17/supply-crunch-supports-european-steel-prices/
https://worldsteelprices.com/2020/06/30/chinese-steel-market-recovery-continues-amid-global-struggles/
