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Leaner times, but still hope
October 2001
EU strip mill product prices may take longer to revive in the wake of the fall out from the 11 September atrocities. However, steel consumers should not expect current prices to decrease substantially in the near term. Neither should they presume that the delay in the recovery will be extensive.
MEPS now believe that the mills' reaction to the decline in the EU economy may be swifter than originally anticipated. Usinor and Sidmar have announced production cuts. Reports are coming to us that Riva is reducing its raw materials intake in preparation for output curbs later in the year. The German sector has been at the forefront of curtailment of steelmaking in recent months with year on year reductions of 9.9 and 8.3 percent in July and August.
December could prove to be a very low output month in the EU. When the previous price cycle was nearing its bottom at the end of 1998, the mills took urgent action in the final month of that year - cutting steelmaking to 10.3 million tonnes from a monthly average of 13.6 million tonnes. Clearly, the steel producers have the ability to slash supply to the market when prices start hurting.
This year, MEPS do not anticipate a 25 percent production cut in December but a significant reduction is likely, particularly from the integrated sector. Many of the long products producers will probably maintain current supply volumes into the New Year because they are under less price pressure. Extended shutdown periods over the Christmas and New Year holidays could become commonplace at the large integrated mills.
Pricing is a problem in the EU steel sector but is not as critical as in North America and other Dollar denominated nations. Current average EU prices for hot rolled sheet and plate are significantly above those at the bottom in the last recession of 1998/9. For cold rolled sheet the situation is a little worse and prices could slip to near the previous lows. For hot dipped galvanised sheet, the present circumstances are critical. Basis prices are already below those in the last slump. Further falls are probable due to massive oversupply.
Production cuts will need to be extended well into the second quarter of next year. Firstly, to redress the current excess of inventories and then to balance out the expected reduction in consumption. The key to success will lie in the mills' resolve to match supply to the market with real demand.
The manufacturing segment of the EU economy has been sliding for several months. This is likely to continue because export markets will be slower and the price advantage from a weak Euro could decrease. Automotive consumption is a bellweather for demand for strip mill products and is now in decline. There are reports that Renault, Volkswagen and Fiat are cutting output by a total of 60,000 units this month. Ford have announced reduced engine production from European plants.
The EU steel sector will have to suffer a period of low prices and reduced output. However, the major companies are in a much better position to weather the storm than many of their competitors around the world. Substantial rationalisation has occurred within the industry already. The economy is not likely to run into recession. The anticipated fall in growth is less than expected in many other parts of the world.
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