Short Range Outlook : June 2019

Uncertainty in global long steel products market increases dramatically

The uncertainty in the global long steel products market has increased dramatically. Nowadays, the most stable region is China, where steelmakers have been increasing their weekly production volumes, whereas the rest of the world is just trying to hang on.

Ferrous scrap and iron ore price trends decouple completely

Ferrous scrap and iron ore price trends have completely decoupled. Iron ore prices have hit five-year highs at over $100/mt delivered to China. Currently, there is almost no margin left for BOF mills. On the other hand, ferrous scrap prices are decreasing. Meanwhile, Turkey, the largest importer of ferrous scrap in the market, is suffering deeply from the collapse of domestic consumption.

Worrying signs amid increased global output and unsatisfactory demand in EU and US

The main issues affecting the market are, first of all, the production increase that the world steel industry has seen since 2016 and, secondly, the unexpected drop in demand in the EU and the activity in the US under the Trump administration which has not been as good as predicted.

China performing well, other regions experiencing difficulties

Steel production globally continues to grow at a strong rate. China is set to break through one billion metric tons in 2019 should it continue at the current pace, while its exports are still muted based on strong domestic consumption. China is also adding EAF capacity at a fast pace to absorb domestic scrap generation and make use of the relatively cheap raw material. In Europe and Turkey, capacity utilization is being cut due to slower orders – in Europe mainly due to headwinds affecting the light and heavy automotive sector and in Turkey due to its reeling economy which is contracting. In the US, capacity has been added which weighs on steel pricing.

Global steel industry still in a better position compared to 2014 and 2015

Overall, the last three years have been very healthy for the steel industry. This year is still fairly good compared to 2014 and 2015. However, mills will struggle in the short run mainly due to the cost issue. The poor demand in the EU and especially in Turkey will pour salt into wounds. Thus, it is time for some mills in some areas to adjust and reposition themselves based on the situation outlined above. Many scrap melters around the world have already decided that less could be better. Meanwhile, ArcelorMittal Europe is the only blast furnace-based producer that has announced cutbacks in production in order to increase prices, and this seems to have worked for now.

US mills show signs of panic, rush to cut their prices

Prices keep going down in the US market. The demand is there and is stable, but the fear of losing the market to imports has convinced domestic mills to race to drop their prices, sometimes without even being asked. Domestic mills were enjoying 25 percent-plus margins, but then President Trump cut the duty on imports from Turkey to 25 percent and the market panicked. Almost at the same time, he announced that the Section 232 tariffs on imports from Mexico and Canada would be reduced to zero, which should affect the market, but the on-again off-again Mexican duty (tied to other matters) made buyers cautious again. Both Canada and Mexico are under notice to not sell more than what they sold before. Regardless, US domestic mills are very uneasy as they have plans to add even more capacity. In addition, the softening of ferrous scrap prices has created expectations for further decreases and has influenced buyers to delay their new purchases.

EU protectionist measures fail to provide expected benefit for domestic mills

In Europe, the current quota system is helping to keep prices stable in many markets, but the safeguard measures have not brought the expected benefit for EU mills. Too many cargoes arrived at the start of the season in February and April and clients have filled their stockyards. Subsequently, mills had to reduce their prices to collect new orders. Now, however, the next wave of imports is expected to arrive in July, which will probably cover a good portion of the demand for the summer period.

European mills under pressure

The collapse of British Steel, the announcement of price increases by ArcelorMittal for long products, and the imminent maintenance stops of European mills could help to increase the prices for long products in the EU market. However, the price trend of ferrous scrap and the general sentiment in the market do not help. Besides, it is quite difficult for European mills to export steel out of Europe due to low prices elsewhere. Therefore, the current alternatives are either to push more steel into the domestic and regional markets and thereby of course end up putting downward pressure on prices, or, on the other hand, to stop production.

Asia outperforms rest of the world, low oil prices a positive development for global market

The stability of China is very important for the global steel industry, while some dramatic change could be seen after the G20 meeting. Steel demand globally continues to grow and keeps encouraging market players. Asia is outperforming the rest of the world. Oil prices have dropped considerably since April, which constitutes another positive development.

Scrap prices currently very attractive but falling prices to eventually impact scrap generation

The scrap to iron ore price ratio makes scrap look very attractive at current levels. The problem for scrap at the moment is the construction sector in scrap-importing Turkey and also the fact that spring in the US has generated a lot of scrap flow. The falling scrap prices will eventually slow scrap generation and availability.

Protectionism limits pressure from competition

More steel producers are willing to take a second look at lower prices. However, the pressure from competition does not seem to be strong and has been diminishing due to political protections in general. Competition in the market is still very much determined by geopolitical factors.

Changeable protectionist picture is the main contributor to current instability

Unfortunately, trade barriers and the tariff picture for the balance of this year is quite uncertain, far outweighing any uncertainty in demand, supply and competition. Margins for steel producers are approaching ‘painful’ levels.

Political developments will need to be watched

The first and foremost problem is capacity utilization which has been decreasing in 2019 in many regions. On top of that, there will be more elections from Istanbul to Jerusalem, the G20 meeting in Tokyo, the US-China trade meltdown, and crude oil crises linked to Venezuela and Iran.

Outlook for market characterized by greater unpredictability

Under the current circumstances, the market can be described as fluctuating and unstable. The outlook is very much uncertain, less predictable and weaker.

Some stabilization may be seen over the summer months

Scrap accumulation is expected to slow down over the summer months in part due to lower prices and in part due to industrial vacation periods. Demand and supply will then become better balanced and stabilize pricing.





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