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EU price rises to continue, but not due to improved demand...
June 2002
The EU steel sector has moved into an unusual state of uncertainty. The mills are proposing higher prices but demand on the steel users is rather sluggish. Moreover, many buyers ordered in advance when prices were low and have reasonable inventories. Consequently, these customers are able to hold back on completing their deals for third quarter deliveries.
Steel consumers are finding it difficult to reconcile increasing costs of raw materials with, at best static and often, declining orders for their products. Statistics show that industrial production in the Euro area in March was well below the year earlier figure. Any improvement is likely to be slow.
The EU steelmakers, on the other hand, are maintaining their resolve that prices (particularly in the strip mill segment) must rise for all orders placed for supplies in the July to September period. This year's price rises in the EU have been almost entirely supply side driven. They are not the result of an expansion in market demand.
Steel manufacturers have improved their position in difficult selling conditions by cutting back production and creating more equilibrium in the market. They have also been assisted by a, lower than anticipated, volume of imports from third countries. Furthermore, better discipline of the price scene has been noted from the producers. The Usinor, Arbed, Aceralia merger into one company (Arcelor) has reduced competition. This factor is of great concern to steel buyers in Western Europe.
The current stand off between buyers and sellers is likely to continue for several weeks before it is resolved. From reports that MEPS International has received, anyone wishing to procure sheet/coil is required to pay all or most of the increases indicated by the producers. MEPS expect mill orders on hand, for deliveries in the next three months, to be relatively weak.
The EU steelmakers are likely to be the winners in the short term. Prices around the world are rising. Competition from abroad is only limited. The mills will achieve virtually all of their target price hikes for the next quarter. Their aspirations for similar increases for the final quarter are also likely to be substantially fulfilled.
Next year, the situation could be quite different. Real demand is not expected to pick up significantly. Lower export volumes through 2002 will release material for domestic consumption. Import competition will, once again, increase due to the more attractive prices and the regularising of the US market, after the panic buying over the past few months.
Towards the end of this year, the EU mills could find themselves with gaps in their order books which need to be filled. This problem is usually addressed in one of two ways - cutting supply or decreasing prices to attract business. For the larger producers, reducing capacityis a realistic prospect. However, for those smaller steelmakers operating from a single mill and meltshop, the situation is quite different. They have more pressure to maintain high plant utilisation. Output from these may expand to take advantage of the improving price scene.
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