Short Range Outlook : December 2018

Global long steel market facing many unknowns amid protectionism and price corrections

There is huge uncertainty in the global long steel products market as there are a lot of unknowns against the backdrop of protectionist measures and price corrections.

US-China ceasefire may reduce volatility in international market

The trade dispute between the US and China has been kicked down the road for another 90 days. The ceasefire in the trade war between China and the US can contribute to a steadying of nerves and to reducing volatility in the international markets. At least, the latest trade dispute deferral may be a positive break for the next 90 days.

US tariffs likely to remain in place for the time being

Canada and Mexico signed NAFTA 2.0 (USMCA) with the US and still have Section 232 duties at 25 percent. The 50 percent duty on Turkish exports to the US still stands despite the recent developments in the political arena. The US Congress is not going to vote on the new USMCA agreement until after the Democrats take control of the House of Representatives. This means tariffs in North America will stay at 25 percent and, most likely, that the duty on Turkish exports to the US will stay at 50 percent.

Year-end destocking to increase pressure on prices in US

Meanwhile, the year-end is getting closer and almost all stockists in the US are trying to lower their inventories. The pressure on prices increases during this process. US mills are not as busy and have shorter waiting periods for deliveries. The same problems are expected to linger throughout the month.

Uncertainty surrounding EU safeguard measures adds to market unpredictability 

The European Union is expected to announce a safeguard measure in the way of country-specific quotas, maybe per quarter. However, the uncertainty surrounding this situation is making the market unpredictable. New rumors are popping up every day as there is no proper and practical treatment of the issue. It seems to be a very politically-driven process.

Inventory adjustment also impacts European market 

A general event this time of the year is inventory adjustment ahead of the New Year period. This has been vivid in 2018 in Europe where the auto industry has slowed considerably in a short period of time, adding uncertainty over demand in 2019.

Turkish mills face difficulties on several fronts

According to a US presidential announcement, the reason for imposing a doubling of tariffs on Turkish exports to the US was the sudden devaluation of the Turkish lira, a reason which is now no longer valid. At the same time, Turkish exports to the US are down by about 55 percent, a far sharper drop than seen for the exports of any other country.

However, the US market remains blocked for Turkish exports. On the other hand, the prevailing prices in the Far Eastern market are now below the cost of production for Turkish producers. On top of these issues, domestic consumption in Turkey has almost stopped and the hit coming from vanishing domestic consumption is very hard on mills. As a result, Turkish mills are not left with much option but to suspend production in the coming months.

Turkish economy expected to contract in 2019, trade measures may be imposed

The markets have deteriorated considerably following Turkey’s economic slowdown. The Turkish economy is now expected to contract for the coming year. The steel and scrap markets will have to accept the impact of this on larger regions for an extended period. Iranian exports to Turkey are also adding to the pressure on Turkish producers, and this development could cause trade measures to be implemented in Turkey also.

Remarkable reversals in steel prices seen since August 

Remarkable reversals in the prices of steel products have been observed since August.  Ferrous scrap prices in Asia have fallen by US$50/mt in less than two months. Available supply cannot be sold profitably. The strong price corrections observed in the market suggest that global business is worsening; however, ferrous scrap and iron ore prices have also indicated corrections, and so the final impact on spread levels should be seen in the coming weeks.

Strength of Chinese steel demand still remains key issue

The key issue for the short term still looks like demand in China. If demand in the Chinese domestic market turns out to be good enough to prevent Chinese mills from being aggressive in the export markets, then spreads will reach an equilibrium at reasonable levels. Otherwise, we will see Chinese exports trying to reach various markets protected by many trade barriers and the consequence will be more pressure in the global market. That said, the situation in China still gives us enough reason to be optimistic for 2019.

Real economy developing better than some previous forecasts

The real economy is developing better than some pessimistic predictions had indicated. No dramatic hike in interest rates seems likely in developed countries while oil prices are lower now, and these factors are also positive indicators for the steel market.

Prices in EU and US considered to be stable

The EU market is strong and solid, while prices in the region are considered to be stable. It looks like interest rates will not increase further, which is good news for the euro. Prices in the US are also considered to be stable.

Build-up of scrap-melting EAF capacity in China is a positive development

The build-up of scrap-melting EAF capacity in China is another positive development, but yet again we are a tweet away from knowing something new or from facing a new situation.

Competition in global market generally becoming stronger

Amid all the aforementioned circumstances, competition in the global market is increasing and getting stronger in general. It has slackened only in certain regions due to the plentiful number of trade barriers, and also in some other regions because few can compete without incurring losses. Chinese mills still do have margins and so competition with China could increase quickly.

Less-than-satisfactory outlook exists for market amid uncertainty and high volatility

The market can be defined as unstable at the current juncture with a less-than-satisfactory outlook due to uncertainty and extreme volatility.




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