Commodities | Apr 10 2006
When Smorgon Steel (SSX) upgraded earnings guidance last week it was on the back of higher scrap prices, but the improvements there appear to be flowing through into the steel market generally.
Asian steel prices in particular have been stronger than the market expected, rising as much as 30% in the past few months in what Macquarie notes was a reflection of ongoing strength in demand.
Merrill Lynch suggests the stronger pricing environment is just as much a reflection of production restraint as strength in demand, though the broker agrees it is a positive sign producers have been able to pass onto consumers the recent costs increases resulting from higher zinc prices.
In the broker’s view further prices increases in coming months are likely, with industry sources indicating Japanese producers are pushing for a US$100/t increase in the price of stainless sheets.
SB Citigroup takes a similar view, its analysis showing prices should remain in the current trend until the middle of the year, before easing into the second half. The broker suggests the potential for weakness later in the year would be a by-product of a lack of action by the Chinese government in restructuring Chinese industry due to the recent boom in production capacity. That country’s largest producer, Baosteel agrees, suggesting a cut in output of 100m tonnes is necessary by the end of 2007 to bring the market into better balance.
There are some signs this restructuring is underway, as market rumours suggests China’s Boasteel is considering a bid for the nation’s 11th largest producer, Handan. While this would be a positive, further consolidation is necessary for the long-term stability of prices in the Asian region, particularly as Macquarie notes Chinese steel production increased in February after trending lower for a few months.
Despite this, the broker also has a positive view on pricing for the next few months, suggesting some operational issues at facilities in Europe and Latin America should prove supportive through the September quarter.
The longer-term outlook, even with the ongoing threat to prices of increased supply out of China, remains positive though, with industry consultants MEPS recently suggesting the current decade will be the best the steel industry has ever seen.