Reasons: The crisis in the European markets and policy tightening in China.
After a bout of price cut, the steel market is unlikely to turn around immediately, especially with the threat of production cuts looming large.
A combination of factors — the crisis in the European markets and policy tightening in China — have suddenly queered the pitch for the steel industry, even though raw material prices are still high.
“We have not frozen our plans as yet, but if things don’t improve over the next few weeks, we might go for a production cut,” said Mumbai-based cold roller and galvanized player, Uttam Galva Steels.
Prices of hot-rolled coil (HRC), a benchmark for flat steel, used by automobile and white goods makers, are ruling at about Rs 32,000 a tonne, down by Rs 2,000 over the last month. With demand weakening, producers are trying to keep prices at the same level.
“Purchases are being deferred. The market is keeping a watch on prices,” said an HRC producer. China’s Baosteel, regarded as a benchmark for the steel industry, has cut July prices by about 10 per cent. Chinese steelmakers are likely to cut production in the third quarter on weak demand and high costs.
However, the weak demand is seen as temporary. “Demand is intact. China has not altered its projection of 660 million tonnes production” said a primary steel producer. According to the World Steel Association estimates, China’s crude steel production for April was 55.4 million tonnes, an increase of 27 per cent compared to April 2009.
Moreover, raw material prices are still high, while finished product prices are soft. Spot Indian iron ore prices have stabilised at $150-$152 a tonne while contract prices are at $120 a tonne, a 97 per cent increase over last year. Coking coal, the other key input, is also quite strong.
The scenario could change in the near term. “There could be a 30 per cent downward revision in prices from October. In my view, quarterly contracts for iron ore will not work in the long run. Currently, contract prices are getting benchmarked to spot, which is irrational,” said Malay Mukherjee, chief executive officer, Essar Steel.
Europe steel output cuts loom
Reuters adds: European steelmakers are braced for output cuts in the third quarter as restocking slows and the demand outlook dims.
The euro zone's recent debt problems have shaken the steel industry, which is still recovering from the economic downturn that stripped demand in key steel-consuming industries like auto and construction.
The demand slowdown is also visible in top steel producer China, where prices have fallen more than 10 per cent since a peak in mid-April. Some Chinese mills are scaling back output as the government tries to cool the economy.
The world's top steelmaker ArcelorMittal said last week that it was considering idling three blast furnaces in Europe to meet lower demand.
Analysts say other producers might follow suit as historically the third quarter tends to be weaker than the second quarter, although this is not the sole reason.
"(An output cut) reflects the end of destocking in Europe," said Macquarie analyst Colin Hamilton. "There is a bit of a seasonal slowdown, so a combination of events suggest demand for steel production will pull back in the third quarter."
Bank of America said ArcelorMittal's move on output, while trying to limit a price impact, "also suggests that the near-term demand outlook may be softer than originally envisaged".
Only 7 per cent of European companies now expect higher demand, down from 13 per cent in the previous week. The number of companies in Europe expecting price rises has also fallen to 14 per cent from 26 per cent.
