EU MILL PROFIT MARGINS TO REMAIN LOW IN THE SHORT TERM

The conversion margin between raw material expenditure and steel prices climbed steadily during 2009 from the low point early in that year. However, despite rising steel prices, the growth slowed in the first half of 2010 due to higher iron ore and coking coal costs. Poor end-user consumption restricted the ability of the mills to push through larger advances in selling figures.

Steelmaker input costs for iron ore and coking coal for the third quarter of 2010 moved back up to the highs recorded in 2008. The MEPS - EU Average Flat Products transaction value in the same period is expected to be around €650 (over $US810) per tonne. This is approximately 25 percent below the record in 2008, despite the rise in raw material outlay this year. When converted into US dollars, this figure is greater at over 35 percent due to fluctuating exchange rates. Consequently, steelmakers have attempted to reduce operating costs in a bid to stay profitable. Nevertheless, their revenue remains significantly below desired levels.

Capacity utilisation rates in the EU in August 2009 were around 55 percent. This figure moved up to approximately 85 percent during the second trimester of 2010 as sales volumes improved. However, weakening market conditions are likely to force mills to cut output in the short term, with average production rates across the region forecast to drop back towards 70 percent. This is expected to put pressure on conversion margins during the final few months of this year.

Quarterly contracts for iron ore and coking coal could change steel pricing trends in the future. Transaction values could become driven more by raw material values than market sentiment if the new cost structure continues. This would, almost certainly, lead to increased volatility in selling figures for flat categories.

Long product mills' profit margins appear to rise as scrap figures move upwards. Likewise, falling input values result in lower revenue for the steelmakers. This would suggest that rising scrap costs are beneficial for steelmakers.

Over the past twelve months, poor activity in the construction sector has added to the decline in steel prices due to decreasing sales volumes. This pushed the differential between selling figures and scrap costs to the lowest figure in six years in the first quarter of 2010. Producers across the region restricted output in a bid to keep transaction values from slipping further. However, this resulted in reduced demand for scrap and, therefore, added to the downward pressure on values for the input material.

Scrap values moved higher recently because of a rise in export demand from Turkey ahead of Ramadan. This should help to stabilise long product prices over the summer period and could result in a modest upturn for those categories which are most directly influenced by the cost of ferrous scrap. Nevertheless, due to weak market conditions we anticipate selling figures sliding over the next few months. Consequently, mill conversion margins are expected to drop over this period. However, price decreases for long product categories are likely to be only modest as transaction values approach a point which will yield no profit for steelmakers.

Source: MEPS - European Steel Review - click here for a free sample copy

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