Continued weakness in the price of steel is leading analysts to question if we could see a relapse similar to that of 2008 when prices plummeted.
In 2008, the steel billet price (three month, USD per tonne) dropped sharply by 81% over a four month period from June to October. The steel billet price has dropped from USD 595 per tonne to USD 525 per tonne (-11.8%) over a six week period spanning September and October and has remained flat, closing on USD 527.50 on November 18th 2011. A December price predicates a further drop to USD 520 per tonne.
Steel companies have responded to weakening demand and lower prices by pruning production leading to concomitant job losses. ArcelorMittal has plants idling in France, Germany, Luxembourg, Poland and Spain with furnaces in Belgium closed permanently.
ArcelorMittal said last week that the planned restart for its steel furnace in Florange, France would, at best, be further delayed to the end of the first quarter of 2012.
The cyclical impact on earnings has been ruthless, with TATA Steel Limited, India's biggest producer, reporting an 89% drop in fiscal second quarter group profits. ArcelorMittal followed suit reporting a drop of 48% in operating income for the third quarter compared to the second quarter, missing analyst estimates.
These sharp drops have prompted Natixis, the corporate, investment management and financial services arm of Groupe BPCE, the second largest banking player in France, to assess the downside risk attached to the global steel market.
Natixis points out that the steel industry never quite recovered from the 2008 collapse with profit margins remaining dangerously low. This leaves them heavily exposed to any further squeeze from falling steel prices.
As far as a potential destocking scenario playing out, similar to that which occurred in 2010, Natixis, said that steel stockpiles remain well contained but iron ore stocks at Chinese ports have pushed up to record highs above 96 million tonnes, due to a sharp increase in domestic supplies.
Subsequently, iron ore prices fell by 30% and coking coal prices by 5.6% in October. With this decrease in raw material prices, Natixis sees margins for steel makers remaining fairly unchanged but there remains a significant risk that this relationship could deteriorate to the detriment of the steel industry if economic conditions worsen.
Natixis said that demand for steel in October remained around 7% higher than the corresponding year but far lower than the 14% growth rate from June to September. Despite this, the Chinese market does not appear to be suffering from any surplus of physical metal.
Natixis concluded that "The recent drop in both steel and iron ore prices offers a warning of what might happen if the Chinese economy were to slow more sharply."
A leading indicator for a drop in steel demand is Ward's report on global automobile inventory levels which shows that October inventories jumped 17% from September. The inventory level is still within acceptable norms but the sharp drop could be a precursor for lower steel purchases by the automobile industry should growth in car sales not take up the slack.
Meanwhile, steel producers are battening down the hatches. In addition to cut backs in production, companies are re looking capital expenditure programs, dividend payments and have improved their liquidity in preparation for any downturn.
(Sourced from www.reuters.com)
