There has been much pained wailing from European steel producers over the last few months about the surge in raw material and other input costs that they are having to face. It is true that this dramatic increase is unprecedented. But evidence is now emerging to indicate the mills’ counter-strategy is working: they are succeeding in passing their higher costs on to customers.

A few European steel producers have announced financial results for the first quarter of this year, and these show improved performances. Pre-tax profits for Finland’s Rautaruukki rose by 525 percent over the January-March quarter last year. At Sweden’s SSAB, after-tax profits hit an eight-year high. Arcelor recorded the best quarterly earnings since its formation in 2002. Even perennial loss-maker Corus returned to the black. The exception was Ispat, whose European operations (largely in France and Germany) saw profits fall: higher scrap costs ate into selling prices that were flat owing to what the company called “earlier commitments” – presumably fixed-price contracts.

Several steel producers have given notice that a steeper rise in input costs is likely in the second quarter of the year. This could be intensified if the recent strengthening of the dollar against the euro persists. However, there are few signs so far of steelmakers’ margins being squeezed. A combination of efficiency gains, price hikes and exceptional surcharges is outweighing the cost pressure. Arcelor openly said it expects profits to continue growing in period two.

Instead, it is the buyers of steel who are bearing an increasing share of the burden and who fear serious shortages. Users have complained about steel suppliers allegedly holding material off the market to gain windfall profits. It would be surprising if there were no instances of speculative activity, particularly among smaller producers. The major mills are unlikely to adopt such tactics. At a time of strong prices it makes sense to produce and sell as much as they can. Mills’ representatives have strenuously denied any deliberate reduction in supply, and say output is being constrained only by raw material shortages. Arcelor, for example, reckons it could increase production by about 5 percent if only it could lay hands on more scrap and coke.

On top of the hike in prices, users are also facing ever longer delays in obtaining the steel they need. For some products we understand that EU customers placing orders this month are being told the steel will not be delivered until October – a five-month lead-time. While crude steel output in the EU15 was 2 percent ahead of last year in the first quarter of this year, output may not continue rising much longer.

It is understandable that consumers should be tempted to place multiple orders for more material than they actually need – in the hope of obtaining at least some volumes.Such practices are helping to store up problems for the future. Over-ordering will precipitate the eventual bursting of the bubble. When the mills catch up with their backlog (probably not until next year), the downward swing of the cycle could prove to be just as dramatic as the upswing.

Source: MEPS - European Steel Review