9 MAYIS 2016
IREPAS Short Range Outlook : May 2016
Supply-demand equilibrium now healthier in global longs market

Supply and demand have reached a healthier equilibrium in the global long steel products market mainly due to Chinese supply being more focused on its domestic market. Low local stocks in the global markets and stronger demand in the construction segment have also helped and consequently prices have jumped to what may be considered to be reasonable levels.

Low stocks still observed in certain markets

Mill stoppages and production cuts have reduced supply and price increases have caused buyers to decide to replenish stocks which had been allowed fall to abnormally low levels. That said, low stock levels are still observed in certain markets as suppliers have not been able to satisfy all requirements for volumes.

Improved conditions for all long steel market players in EU

In the European market, long products are still trying to catch up in terms of price as raw material prices have been rising faster due to the rapid movements in the global market. On the other hand, the economy in the EU is showing growth, though at a modest pace, and demand for steel in the region remains consistent. In general, all players, buyers and sellers, believe present conditions in the EU are better and allow everybody in the supply chain to run their business with improved financial results.

Better supply-demand balance also seen in North America

Supply and demand are better balanced not only in the EU but also in North America than at any time in the last two years. Local producers in North America have not increased production in any noticeable way. Price increases have been enjoyed by all parties in the business. However, prices have kept moving up and sellers will have to convince buyers that the higher levels are the new normal and that they should make their long-term comittments for imports arriving in the August-September period. In the US market, import prices for future delivery are no longer competitive against domestic prices with their traditional margins.

Less competition due to antidumping measures

There is a bit less competition in the global long steel market in 2016 than there was in 2015 due to antidumping measures. Also, with stronger commodity demand comes higher sea freight charges and reduced possibilities for the long-distance competition which helps to keep markets in check. As a result, import competition in local markets is down. Amid less participation from China, competition appears fair at the moment and, even though competition is still high, orders are placed at reasonable price levels.

The big question – How sustainable is the current market situation?

How sustainable is the current market situation? – this is the big question at the present juncture. The previous period of unreasonably low prices was not sustainable for anybody and, as a result, almost every member of the industry faced huge losses. However, the current situation does require major questions to be answered. The price hikes are not due to a sudden increase in consumption, with demand mostly based on restocking. The weaker US dollar, the increase in oil prices and low interest rates are other factors providing support for higher commodity prices. The major issues in the market which require attention are as follows:

How long will domestic demand in China continue at present levels?

When will the current restocking activity slow down?

How do mills react to price increases as far as their production levels are concerned? In March, China produced 70 million metric tons and exported 10 million metric tons, and similar attempts to increase output have also been seen in other parts of the world. The increase in production in China has already begun to cause price erosion in Asia.

Protectionism is becoming more widespread, with countries adopting an increasingly aggressive approach. The US is particularly noteworthy in this regard as it simply ignores WTO rules to protect its domestic industry. Under such circumstances, international trade will certainly be affected.

Steel companies still going through process of restructuring

Steel companies and mills are still going through a process of restructuring and further restructuring in terms of asset reallocation and production adjustments should be seen in the near future. If the adjustments turn out as expected, this should help give consistency to the latest price movements and to generate further improvements in the supply-demand balance.

Financial stimulus a key driver in China in 2016

Financial stimulus in China within the fields of infrastructure and home mortgage lending has been a key driver so far during 2016. Other positive factors for the market include stronger commodity prices and better steel product prices which allow producers to recover some margins in their business, the prevailing lown interest rates, the weaker US dollar, the higher oil price, and low iinventory levels.

Unhealthy low price environment now over – at least temporarily

The unhealthy low price environment is over – at least temporarily. A better financial performance is being enjoyed by the whole supply chain, even though the situation may be considered too good to be true. The markets have not been interfering with each other as much in the last few months and so demand will remain fairly strong for the coming month. The prevailing market conditions are foreseen to be stable for the short term but obviously some fluctuations may be seen later because the market is still unpredictable as nobody knows what decisions may be seen next in the political sphere.

Scrap market expected to come under pressure from increasing supply

Even though prices are healthier now, scrap yards are collecting new material rapidly at these price levels and so there will soon be increased scrap supply competing for the same low demand levels. Since the higher prices have been driven by reduced supply and not by demand and as plenty supply is expected to arrive into market in due time, it is inevitable that the market will see some correction, though not to levels at which it would be more economical to buy Chinese billet than to melt scrap.

Challenging times lie ahead while market situation remains unpredictable

Under these circumstances, market players still need to be careful as the situation is still unpredictable depending on how sustainable Chinese domestic demand will be. Ramadan and the summer season are also around the corner and current prices might not be stable. Challenging times lie ahead but an even better supply-demand equilibrium can be achieved with more adjustments on the supply side.