21/05/14 – European steel prices to strengthen in the autumn

 
As steel demand picks up in Europe, Metal Bulletin Research (MBR) raises the question of whether the supply side will be able to moderate its response.

The cautiously optimistic outlook for the European steel market voiced at the end of last year, seems to be turning into reality.

Mills report heightened purchasing enquiries in recent weeks from across the region – not just the summer-holiday affected south that always inspires some pre-July restocking – as a sign that the market must be tightening.

The signals of rising underlying demand are clearly getting stronger.

The first estimates by Eurostat for industrial production in Europe (EU28) suggest that over the first quarter it rose by 1.6% year-on-year, below the growth rate forecast for the year overall by independent agencies such as the OEF, but indicative at least that real demand for industrial steels has started to recover; whether or not it could be about to accelerate.

Arguably even better news for steel mills, particularly for basic hot rolled coil (HRC), is that construction output continued to revive at a far more rapid pace of 6.7% year-on-year on the same basis, driven by double-digit growth in Germany (+14.3%) and Spain (+19.5%).

The construction industry made up about 34% of steel consumption in Europe last year.

Italy remains the significant outlier in the region, where construction output continued to decline, albeit at a slightly slower pace than recent quarters of 5.4%.

While it would have made sense for overall steel production in Europe to rise somewhere between the industrial production growth rate of 1.6% and the overall growth rate in construction at 6.7%, the World Steel Association reveals that regional production growth over the first quarter rose exactly in line with top-end of construction activity at 6.7%, roughly three-times faster (in percentage terms) than the rest of the world.

While the growth in demand has been the greatest in Germany and Spain, supply growth has been far more pronounced in Italy and the UK.

Although the production gains this year have as much to do with a weak comparison in 2013 – amid the political/environmental issues surrounding the Ilva plant in Taranto in Italy, and the early-stage ramp up of Tata’s new blast furnace in Port Talbot in the UK – it is no coincidence that prices in Italy and, indeed, the UK since April, have been under most pressure, partly because of sterling’s strength and the new 30-day payment terms introduced by Tata.

Clearly, imports have also had a part to play in this story of surplus supply, particularly for higher-priced and more profitable cold-rolled steels (coated or not) but this is harder to argue for HRC.

The chart below shows that external supplies of HRC to Western Europe overall were on course to fall in the first quarter and by more than 6% based on a year-on-year comparison. Among the “big five” exporters (see chart), Turkish volumes had fallen by 68% during the first two months, only partially offset by higher volumes out of India and the mini revival out of China for boron-containing material.

 

HR Coil & Plate exports to Western Europe from third countries, '000 tones

HR Coil & Plate exports to Western Europe from third countries, ‘000 tones

 

In the past week, several traders told Steel First that ArcelorMittal is attempting to raise HRC base prices for June, July, and H2 contract shipments for industrial users.

In contrast to the mills, traders were more sceptical about how successful those attempts would be, owing to surplus supply conditions.

Spot-market buyers polled by MBR, meanwhile, suspect that, if anything, the contract price could in fact fall by €20 per tonne to a €420/t minimum.

While MBR suspects that CRC imports will remain elevated, so long as local prices maintain a profitable premium over HRC, currently between €70-85 per tonne and roughly £50 per tonne in the UK compared to around €40 per tonne on costs, the pattern for HRC should prove different.

So far this year, HRC producers in Europe have had a negative margin on sales, though operating conditions have improved year-on-year as ArcelorMittal results show (below).

Nonetheless, the low prices have clearly dissuaded most external suppliers from the market and recent domestic price weakness suggests that importers will be disinclined to “go foreign” – raising their share of imported material over purchases from the domestic market.

While mills have claimed some success in lifting prices in small pockets of Germany and Switzerland for June and July, we have nevertheless downwardly revised our short-term forecasts for June and July and are less sure than before that €10-15 per tonne gain we predicted will be widely recorded over the next couple of months.

We believe that an autumn revival is far more realistic.

Chinese mills have established the floor for September delivery at €408 per tonne cfr in the latest bookings recorded in southern Europe, unchanged from August.

But from October shipments, we believe local producers and regional stockists and service centres would more likely support ArcelorMittal’s next attempts to raise spot prices.

As for the H2 contract for industrial users, however, buyers will have to estimate the impact of a potential fourth-quarter price rise in the spot market over third-quarter stability.

Should the full €20 per tonne plan be accepted, contrary to market expectations, MBR is likely to upwardly revise our H2 price forecasts.

 

ArcelorMittal operating income, $ per tonne, Q1 2010-Q1 2014

ArcelorMittal operating income, $ per tonne, Q1 2010-Q1 2014

 

 
Source – Strategic Research Institute, SteelGuru.com