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Asian price rises help steady the global ship
Steel Business Briefing
Port Pipe and Tube Inc
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Company: Steel Business Briefing, United Kingdom
Attn: Andrew Goodwin

Asian buying in the first weeks of the year has helped steady the market, but it is unclear if this, together with moderate US demand is sufficient to stabilize a ship facing an overstocked Europe.

Demand in Asia has been strong for both coil and long products during January, and prices have increased on a weekly basis. Although the Chinese New Year holidays will curtail activity for one or two weeks, many buyers have continued making commitments up to the last minute.

Meanwhile January business in Europe and USA has been much more subdued. The higher stocks, which were built up at the end of Q4 have been slow to move and new replacement buying has been slower than seasonally normal. But the main reason for lower business activity is the disagreement between the major mills and the larger stockholders about market direction.

In Europe, for several months, stockists have seen slower end-user off-take by their buyers, who are also querying the higher price levels. This has led to reduced orders for the mills, which are taking a firm line on prices. Hence the stockists themselves are being squeezed, though benefiting from the higher value of their old stock. Some producers are rumoured to be cutting production to reflect this lower demand, and to attempt to keep prices stable.

In the USA, the major mills are experiencing average demand, and as usual are responding quickly to match the market. So far this year in most cases their official price rise announcements have been offset by a corresponding decrease in surcharges, which is leading to level prices despite lacklustre demand. However, activity is not as slow as Europe, and mills and major stockholders are generally satisfied with the level of business with longs being better than coils. This is unusual for Q1, and appears to reflect some delayed investment and construction activity.

In the Middle East and India, among other importing regions, demand is more closely following the Asian situation, and buyers have been paying slightly increased prices since the New Year.

The key trading suppliers such as Russia and Ukraine are enjoying good demand, and are starting to rebuild their price levels after the declines at the end of last year.

It seems that Europe is the main region, where the forecasts of firm demand in 2005 are still to be seen. Elsewhere the anticipated increases in demand are already taking effect, and prices are responding accordingly.

Looking forward for the next three months, the mills in northern Europe appear determined to hold an official line on prices, though realistically the proposed increases may be reduced to Euro 5-10/t at best, rather than the 5-6% that they sought. If the major buyers have to begin re-stocking before any Q2 price announcements and negotiations are concluded, then the price momentum will return to the producers. It is then likely that the full increases of Euro 25-30/t attempted for Q1 may be achieved. At press time, ThyssenKrupp announced a Euro 15/t Q2 price rise for coil products, saying that it is experiencing continued strong business conditions.

But in the meantime, the reports of cheaper Asian imports, and the lower mill prices on offer from southern Europe (down to Euro 480/t for HRC) have been encouraging some buyers to try to renegotiate their Q1 prices. However, the potential fear of many buyers of committing to higher priced purchases, before a possible price fall is probably easing. This is as they assess the global position, and face the northern mills fierce determination to maintain prevailing market levels.

The most significant development has been the appreciation of the dollar against the Euro since early January. This, together with rising Asian prices attracting surplus production is really limiting buyers options, and reducing the possibility of imports into Europe. From a peak of US$1.36/Euro, the dollar has strengthened to US$1.27. Thus for a price of Euro 500/t, this represents a dollar price decline of US$45/t in one month to $645/t, giving a potential supplier a lower return. Therefore unless demand completely stagnates, the likely outcome is for an acceptance of a small quarterly rise.

Although HRC is mostly holding in northern Europe at an ex-works level of Euro 500-520/t, and CRC is steady at Euro 600-620/t, there is definite weakness in HDG due to overcapacity and some imported material in the thinner, more expensive range. Prices are indicated at Euro 620-640/t base.

The coil producers in USA have apparently been surprised by the lacklustre off-take since the New Year. The over-stocking built up at the end of 2004 seems to be higher than realised, and has proved slow to move. This reflected a combination of domestic deliveries catching up, and imported material continuing to arrive at a high rate, in some cases after earlier delays.

Despite, or because of the reduced demand, the effective price levels for HRC have remained static since Q4, but the mills are apparently just biding their time until demand improves. Spot prices are now mostly in the range $600-670/s.t. Meanwhile, a report of potential exports to Mexico, Canada and further afield will only serve to improve market sentiment whether or not they finally materialise.

The strongest market area for coils so far this year is Asia, with Chinese buyers in particular looking for significant tonnages and prices have been rising accordingly. Although they still lag levels in Europe and USA, the current prices are sufficiently attractive to third country suppliers whilst exports from the region are now uneconomic.

In China, the major domestic mills have already been able to achieve their Q1 price rises for coils. Even the increasing exports to other Asian countries of HRC, chiefly from smaller mills with lower quality capabilities, are positive for the continuing healthy price levels.

Although smaller in terms of actual tonnage consumed, most of the central and eastern European countries are showing good growth in demand. This is absorbing tonnage that historically would have been exported into western Europe or Asia.

Similarly the Russian and Ukrainian domestic markets are experiencing continuing strong demand, which is limiting the availability of coils for exports. Meanwhile their slab exports to high-paying markets like USA continue at a fast pace.

Demand is also strong in other markets, which import coils from CIS origin, particularly the Middle East. In addition, Indian cold-rollers have entered the market looking to buy re-rolling quality coils from Russian mills. These demands will further restrict the tonnages available for other, potentially over-supplied, markets.

Producers of plate continue to enjoy a very strong market with demand perpetually just ahead of supply. European spot prices are above Euro 630/t ex works for Q1, while contracts, which account for more than 50% of capacity, will this year be much more reflective of current spot pricing. A further Euro 20/t increase for Q2 is very likely to be accepted without too much trouble. ThyssenKrupp is said to be looking for Euro 30/t. Prices in Asia, especially for ship plates, are also firmer as Chinese mills cut back on tonnage, and implement higher prices.

In USA, demand for plate is still strong and prices are at least stable around the US$ 800/st fob mill level. Some recently announced price increases may not be taken up by all the mills and thus may not be completely accepted. Further ahead, the planned restart of a plate mill by ISG could potentially alter the supply-demand balance.

Initial activity in January in long products was better than normal for the season and although business is generally tough, prices are mostly steady. Producers are confident of maintaining current price levels, and then seeking increases at the start of Q2, which is traditionally the time for the strongest market.

In Europe, though the steel-intensive parts of the construction market remain rather soft, buyers and suppliers seem well-matched overall with some producers fighting for increased market share. Imports have reduced from the peaks of mid-2004, which also helped limit the end of year stock-overhang. Merchant bars and debar stockists are finding steadier prices and demand. But higher quality wire rods are firming in price due to strong business conditions.

It appears that the only potential problem is the comparative weakness of the lower grades of wire rods. However, the market is predicted to pick up here too at the start of Q2. This is particularly likely if imports reduce as a result of improved activity elsewhere, and the weaker Euro leading to reduced dollar returns.

Billet prices in Asia have also been higher overall despite there being only a small margin for conversion in some countries. After a period of strong export activity, Chinese suppliers are not offering for new business for March shipments, and many buyers moved quickly to buy in from alternative suppliers, such as Korea, where the market is weak. This led to stronger apparent activity than is usual in the run-up to Chinese New Year, with some buyers concerned that prices will be even higher when they return.

Most long products producers in USA have been maintaining effective prices, by matching surcharge reductions with price rises as demand remains steady despite the usual seasonal slowdown. Prices of wire rods are well above Long product prices Jul 04 Feb 05 US$500/st fob mill. Reports that imports are continuing at a high level, particularly from China, do not seem to be depressing the market. Currently mills are switching or cutting production rather than lowering prices, and are confident that demand can only increase as they move into Q2.

Domestic demand for long products in Russia and Ukraine continues to grow fuelled by the construction sector, which is running at a 4% annual growth rate. Turkey too is expecting a resurgence in domestic demand, and the first year of construction sector growth for four years.

The contract negotiations for raw materials appear likely to result in much higher increases than anticipated at the start of the year. Coking coal prices have more than doubled for most major buyers with German mills, Posco and Asian mills confirming rises of around 120%. Iron ore negotiations are still pending as the reported requests for 90% rises from some miners are digested by the major mills.

Whilst anticipated demand for 2005 for iron ore would indicate that most of this increase will be accepted, the significant change in scrap prices in USA recently may give a small amount of respite. Although the headline numbers in USA are largely overlooked as being unrepresentative, there has been a dramatic drop in transaction price levels. Prices in Europe are still steady, and Asian buyers have been keeping higher stocks as they anticipate higher prices next month. Unless mills everywhere are found to have over-bought, it seems likely that these falls in USA prices will be only temporary.

The outlook for the second half of 2005 is therefore likely to be dependent on whether the producers can ensure that output matches actual demand for the rest of Q1 and Q2. Whether the predicted global growth in demand of at least 3% over 2004 is actually occurring by then, it is important that any real or perceived over-stocking has been allowed to flow through the system. Otherwise the increases in production capacity, which are already becoming increasingly available, could force market sentiment into a negative direction. And if China becomes a serious net exporter, this could exacerbate the trend.

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