AVAILABILITY HAS REPLACED PRICE AS MAIN DRIVER IN STEEL MARKETS

World production of crude steel in the first quarter of this year, at around 252 million tonnes, was very close to the top limit of its practical capacity. Theoretical output potential is rather higher.

Period one steelmaking was 20 million tonnes higher than the in same quarter of last year. Clearly that rate of increase cannot continue: there are not enough raw materials. For the second trimester of this year – when there are fewer holidays and when the weather is generally better for steelmakers in the northern hemisphere – MEPS World Steel Outlook is forecasting world crude steel production of close to 255 million tonnes. This will be about 13 million tonnes above the 2003 second quarter, and will continue to stretch the material supply chain to its limit.

The surge in demand for steel as prices kept steadily rising has put steel mills and their raw material suppliers under pressure to operate flat out so far this year. Nevertheless, there have been shortfalls. A tropical cyclone disrupted iron ore production in Western Australia. There was a global shortage of coke as China cut back on exports. Raw material deliveries to steel making plants were constrained by congestion at ports and on railways, and by inadequate shipping capacities.

The crisis on the input side has spread to new areas. Ferro-alloy prices have joined in the upward surge. Some steel companies are now asking their clients to pay an alloy surcharge for manganese. Moreover, the price of molybdenum jumped by 50 percent within two weeks to hit a 25-year high in mid-April.

As steel producing companies are talking with increasing openness about shortages, the market is becoming ever more panicky. Steel buyers are placing orders for future delivery without knowing the price they will eventually pay, simply to secure material. Even some customers on long-term deals have been persuaded to pay a non-contracted price increase on account of the surge in raw material costs.

We now see signs that panic buying is spreading down the supply chain to products made out of steel. Problems are being created by end-users building up stocks, in the fear that they might otherwise find steel-containing products unobtainable. This is what is spooking the market. A few months ago all the talk was of the rapid rate of price increase. Now the problem is actual availability. Physical supply is everything.

The start of period two has seen further increases in steel prices. Signs for the third quarter are for the same again – or even more in many cases. The €100 per tonne basis price increase being talked of in Europe for flat products may not be achieved in total. But it has certainly got buyers worried.

Source: MEPS - International Steel Review