What's the global steel pricing outlook for the second half of 2004?

As of late June 2004, it seems to be pretty good for the steel mills. Following are some pros and cons for world steel sheet export prices in the second half of 2004, with many of the items coming from discussions at the SSS XIX conference, organized by World Steel Dynamics and AMM. Please note that a “pro” is a force working to sustain or push up the already-elevated world export price for hot-rolled band. There are few indications that a pricing “death spiral” for hot-rolled band on the world steel export market is imminent.

Cons

• Excessive investment in fixed assets in China, which is up by about 35% this year to date.
• Chinese exports of steel sheet products are rising.
• For seasonal reasons and also because hot-rolled band export prices are so elevated, several experienced steel traders at the conference felt that the steel market might start to collapse in August.
• Ukrainian steel mills may be offering their hot rolled band (which WSD places in the Tier IV category), FOB Black Sea ports, at about $400 per tonne in China and about $430 per tonne to other destinations.
• Chinese coke export prices are coming down. Versus the peak in March of about $450 per tonne, FOB the Chinese port, the price may now be down to about $300-325 per tonne say our contacts.
• Ocean freight rates have collapsed in recent months. While they now appear to have bottomed and may be rallying, the sharply lower price will permit steelmakers’ raw materials and steel goods to be delivered at sharply lower prices than previously.
• Coking coal deliveries from Australia, Canada and the USA have been rising in the past few months.
• Chinese mechanical coke oven capacity is expected to surge by 56 million tonnes to about 220 million tonnes in 2005 versus 164 million tonnes in 2003.
• Steel’s technological revolution continues to move ahead at a rapid pace. (Note: WSD dubs this item a “con” because it accelerates cost cuts and encourages new steel mills to boost capacity on a relatively inexpensive and/or lower economy of scale basis.)

Pros

• Steel production apparently remains restrained in many countries according to a number of the speaker/panelists. The most significant restraint is coke availability.
• The world export price for hot-rolled band for Tier I to Tier III exporters remains at elevated levels. The export quote, FOB the port of export, seems to be in the $510-530 per tonne range, and perhaps even higher in some instances. Russian mills are allegedly obtaining about $520 per tonne in some cases, just slightly below the price for some EU mills.
• Steel slab export prices are up sharply. The price of slab had risen to $500 per tonne, FOB the port of export, from about $450 per tonne two weeks ago. A
• Steel scrap prices have risen from their recent lows, first in the USA and, then, delivered to Pacific Basin destinations.
• The USA steel sheet and long product markets remain strong. We did not hear of new price cuts despite the huge price boosts this year, far lower steel scrap prices than three months ago (although up recently) and rising foreign steel offerings in the United States.
• Net imports of steel sheet products to China fell sharply in May. Chinese net imports of steel sheet totaled 1.5 million tonnes in May, versus an average of 2.7 million tonnes per month in the prior year. (Note: WSD places this development in the “pro” category because, despite lower bookings of foreign steel for delivery to China, the world steel export prices for most mills, except the Ukrainians, have been firm due to strong demand from other markets.)
• Steel sheet pricing in the EU market remains strong. The attendees felt that the EU economy was picking up and that the EU mills would be successful in garnering some very sizable price boosts in the third quarter.
• Chinese domestic steel sheet and long product prices have rebounded off the recent lows.
• Oil prices have been sliding.
• Industrial production gains in many countries have been so substantial in the last year that WSD suspects that global steel demand is up more than is generally realized.
• Steel mills are having equipment problems in a number of countries, including the United States, which will reduce near-term offerings of steel sheet.
• U.S dollar seems likely to weaken sharply in the next few years, although not necessarily on a near-term basis, because of the massive USA current account (largely trade deficit). (Note: This item is considered a “pro” due to the inverse relationship between the value of the dollar and world steel export prices.)
• Consolidation in the industry seems to be adding to the steel mills’ pricing power in steel sheet products. About 50% of the USA market is controlled by three companies; about 43% of European market is controlled by three companies, and about 65% of Japanese market is controlled by 3 companies.

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