The last twelve months was a turbulent period for steel purchasing in the European Union. The MEPS – EU average flat products composite steel selling price declined by €83 per tonne (17.5 percent), in the second half of last year.
By December 2015, domestic transaction figures had fallen to a twelve-year low. Substantial import pressure, both in terms of value and volume, forced domestic mills continually to reduce their price offers. The negative situation was compounded by falling raw material costs, nervous buyers anticipating further price reductions and a seasonal slowdown in demand. This created a perfect storm for the price collapse.
Activity in the European steel market remained muted at the beginning of 2016, with little prospect of a significant recovery in selling figures. A dramatic “volte-face” in pricing strategy by Chinese steelmakers brought a halt to the race to the bottom in global steel prices and transformed the outlook across the whole international steel scene.
Production cuts earlier in the year, low inventories throughout the supply chain and a seasonal pickup in demand provided the backdrop to a rapid rise in domestic Chinese steel prices. The government’s policy of large-scale monetary easing boosted construction activity. It also had the effect of driving up the futures market and increasing trader speculation. This scenario encouraged Chinese producers to hike their export offer prices.
The substantial losses previously made by the majority of the Chinese mills could not be tolerated for a significantly longer period of time. Furthermore, with the volume of China’s exports rising rapidly, at prices often below domestic values, the profitability of the policy was deteriorating over time.
Moreover, charges of dumping were bringing to the forefront claims of unfair trading from steel suppliers in a wide range of countries. These were undermining China’s attempts to show that it was operating a market economy within the regulations of the World Trade Organisation.
As Chinese export prices surged, many other major exporters, including those in the CIS, South Korea and Brazil, followed China’s lead and hiked their prices. Faced with unattractive import quotations, many buyers in Europe returned to domestic sources for their purchasing requirements. Consequently, European steelmakers captured a greater share of the local market and regained a degree of pricing power.
The mills took the opportunity to boost their profitability, after margins fell to an unsustainably low level at the beginning of the year. The MEPS – EU average flat products composite steel price jumped by €124 per tonne (31 percent), in the second quarter of this year. Selling figures then softened by €15 per tonne ahead of the summer holidays, in July.
The negative price sentiment, witnessed immediately before the long vacation period, has turned more positive. We have reports that strip mill product manufacturers are planning to raise their offer prices for September negotiations. Steelmakers hope to capitalise on tight availability within Europe and the recent uptick in the Chinese domestic steel market.
MEPS predicts that the short-term price trend will be stable, with increases difficult to achieve. We forecast that selling figures will decline in the final quarter of this year. Supply is expected to improve, in what is traditionally a slack season for demand. Furthermore, competitively-priced offers from overseas suppliers and low steelmaking raw material costs are forecast to exert negative pressure on local transaction values.
Despite the anticipated price reductions, MEPS believes that steel selling figures will remain above the low levels recorded in late 2015 / early 2016.
Source: MEPS – European Steel Review – August 2016 Issue