GLOBAL STEEL PRICES PLUMMET DESPITE SIGNIFICANT OUTPUT CUTS

Despite substantial mill output cuts, with capacity utilisation down below 50 percent in early December, US transaction values continue to drop. Market players do not feel that the bottom has yet been reached. Purchasing came to a virtual standstill in late November and no pick up is anticipated for the remainder of this year. Weak activity in all the main steel consuming sectors is to blame. Although, in traditional terms, distributors are not holding high inventories, levels are still above those required for current sales volumes and further destocking will take place in the run up to the year end.

Production levels have also been significantly curtailed at facilities in Canada. Order intake is extremely sluggish with buyers continuously pushing for lower prices and demanding very short delivery lead times. We understand that the current inventory run-down will be completed early in 2009, so this should support a pick up in purchasing. Recently, offshore material has become available at well below domestic prices. However, customers will not risk taking any long term positions.

Chinese flat product values have rebounded as the government's new investment package and fiscal stimulus plan lift business sentiment. Unfortunately, the recovery could be short-lived if excess supply continues to plague the market. Some mills that were idling production have already resumed output. Weakening Chinese exports of home appliances and machinery have cut domestic steel demand, whilst overseas sales of steel, which were expanding at an extraordinary pace, continue to fall away.

Japanese mills have deepened their output curbs in the light of bleaker sales predictions by major end-users such as domestic appliance and auto manufacturers. Inventories of strip mill products held by local steelmakers and distributors, at end October, moved up by 1.5 percent compared to September - they now stand 12 percent above the 4 million tonnes level considered to be appropriate in a normal business climate. Quayside stocks of imported flat products increased by 11.5 percent in the same time frame, as overseas mills took advantage of the appreciating Yen to push steel into the Japanese market.

The South Korean demand forecast for 2009 is dismal. Both construction and manufacturing industries are suffering badly as a result of the global downturn. A growing number of steel producers are reducing capacity in order to cope with tumbling sales. In response to a gloomy market outlook, Taiwan's leading steelmaker, CSC, has promised to slash prices by an average of over 20 percent in the first quarter of next year. The company will also limit output by approximately 10 percent because of maintenance shutdowns at its plant in Kaohsiung.

Falling demand for steel products has led to swingeing production constraints and the announcement of a massive redundancy programme at mills throughout Poland. ArcelorMittal will apply lower basis prices for period one business. Values have already fallen as the economy slows. Mill sales have gone down in the Czech Republic and Slovakia. Many manufacturing companies will close in mid December and not reopen until the middle of January. The recession in Germany is the main threat to Czech exporters. The negative economic news from that country could damage Czech development in 2009. Meanwhile, consumers are only buying the steel they need immediately. Stocks were low before the crisis struck and companies have no plans to rebuild them at present.

West European producers continue to impose huge output cuts in the face of an unprecedented downturn in real consumption and a massive destocking programme by customers. It is likely to be some time in the first half of 2009 before these measures bring the market back into balance and put a floor under ever-decreasing prices.

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

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