Steel prices: the snake is back

Written by AS Firoz | Updated: Jun 30 2009, 04:30am hrs
It is a big relief for the steel industry globally to see a rather unexpected rise in steel prices. Most had believed earlier that more optimistic scenarios would not incorporate anything beyond a status quo in prices. Today, one has seen just not that, but, a rise over 50% from the lows of the recent times.

The good news is that global production numbers for May are higher from the previous month by about 6 million tonne. There has been improvement month-on-month indicating clearly that the worst has been left behind.

However, the May output of 95.6 million tonne of crude steel are still 21% lower, year-on-year. Therefore, it is not difficult to understand that the current prices are being held at fairly low levels of supply. The price hike is being driven by lack of sufficient steel on offer in the world market. China's involvement in the export market has been minimal. Users, seeing hopes of an economic recovery and being backed by easier finance, are able to raise inventories. Steel consumers are seeing the end of opportunities of procuring steel in their own terms.

Traders and stockists are showing willingness to buy and hold stock to make a few bucks in the days ahead. Iron ore prices in major contracts did not fall as much as one had expected earlier.

In fact, with higher ocean freight, iron ore, scrap and coal are turning out to be more expensive than one had expected. With this, the fear of low-cost steel creating a low price syndrome in the market seems to have gone. Confidence is back in a limited way in the world of steel.

The pure panic of falling prices and the fearful sight of inventories are no longer driving the sentiments of steelmakers.

But, all is not so well. The price rise has been more prominent for HR and CR coils and sheets. Long products price rise has been driven more by higher ocean freight costs of scrap than by an upturn in demand. Prices of plates continue to remain weak.

The current conditions of the steel market have been shaped by the factors on the demand side of the market. The sudden drop in demand brought prices down to the rock bottom and the marginal improvement in demand is helping prices up. However, steel pricing conditions in the relatively longer term are determined by the supply side of the market.

Steel prices will hold strong if and only if the excess supply potential is wiped out. It is unlikely that steel demand will be back so quickly that it will absorb the current excess production capacity immediately to lead to another shortage syndrome for yet another speculative and panic driven surge in prices of the kind witnessed in the middle of the last year.

But, the steel industry will gain from slow and steady growth worldwide.

In the days ahead, one will have to watch out for the threat from Chinese steel on the world market. It is very unlikely that the country will go on and building industrial infrastructure and stock of commodities including steel and iron ore. The fall in their exports in general will hit their growth path significantly. It will always be increasingly difficult to substitute their exports by domestic sales, despite the fact that exports actually have not been as important as their domestic market has been all this while. But, large purely export-based capacities will certainly suffer. In steel, the upcoming coastal steel plants will certainly look to tap the world market. They are of global size and have state-of-the-art technology. They are potential headache for others in the long run. The steel price trend will perhaps look like the picture of the snake in world steel dynamics reports!