Commodities | May 17 2006
By Chris Shaw (Tokyo)
According to steel industry consultants MEPS demand for steel in European markets has been stronger in recent weeks than market participants had expected, which is likely to see prices push higher than had been forecast.
While this is a positive, MEPS cautions over the medium-term outlook as it suggests the current price surge may prove to be a bubble that could burst by the end of the year. It supports its view by suggesting while actual consumption has increased, much of the demand is due to re-stocking following significant falls in inventory late last year.
It notes the current strong demand also reflects the intention of producers to lift prices in July, which is causing buyers to try to gain additional stockpiles before the prices increases come into effect.
MEPS points to recent steel industry estimates as evidence of a bubble forming, the estimates suggesting while actual consumption in the EU could record an increase of 1.4% this year, apparent consumption is likely to show a gain of 5.1% year-on-year in the second quarter and around 7% in the third quarter, which indicates an overheated market.
The consultant suggests at some point the speculators in the market will perceive a top has been reached and will begin to dump their holdings, which could trigger a significant fall in prices. This is most likely to occur later in the year, so MEPS cautions that what comes up must come down, the rate of the fall often being much faster than the speed of the climb.