Imbalances in supply and demand send EU steel prices into free fall

Thu 20 Nov 2008

Demand for steel in the EU has collapsed. Current price levels are, however, hard to verify because very few forward orders are being placed. Buyers are afraid to purchase because selling values are dropping on a daily basis. Moreover, customers' orders books have reduced dramatically - leaving OEM's and distributors with excessive inventories.

Such is the decline in real consumption, that existing stocks through the supply chain will be sufficient to meet market requirements for several weeks and even months ahead. Recently announced savage cuts in steel production are not just required to rebalance the market in the short term. They are necessary to cut costs as the mills and service centres are facing unprecedented negative price pressure. This is because customers are only buying steel products which can immediately be converted to finished goods as the credit hurricane sweeps through the manufacturing sector in all member states.

We believe that the current difficulties will not be sorted out until the first quarter of 2009 at the earliest. The steelmakers have been left with large quantities of unsold, part and fully finished, material lying on the floor. Some of this has been cancelled by customers who cannot pay for it. A proportion was produced in standard sizes to make economic batches as bookings fell short of expectations in the third trimester.

The market is awash with steel. Some mills are reported to be "open to offers" for material. However, in these difficult times, MEPS has collected prices for transactions between steel producers and their customers - often from existing stocks on short term deliveries. We have not included in our tables some of the "one off fire sale" deals which have been settled during recent weeks at figures substantially below replacement value or cost of production.

Lower taxes, new government spending on projects in the manufacturing and construction industries, plus an easing of credit restrictions after state funding in the banking sector, should lead to an improvement in activity in the steel market. The advance is likely to be slow but mill output cuts should hasten the time when equilibrium returns to supply and demand. Market prices should pick up in the early part of 2009. The gains will, almost certainly, not match those seen in the period up to the summer holidays.

Source MEPS

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