Commodities | Jul 31 2006
By Chris Shaw
Markets generally overreact to both good and bad news and the steel market is no exception, Credit Suisse pointing out whether steel price fluctuations are blips or corrections, steel equity prices will generally overprice the move.
This, according to the broker, makes it difficult to know whether the current trend in the market of lower spot prices in China, which is flowing through into the other Asian markets, is an early sign of a correction or simply a reflection of more volatile markets given thin trading during the European summer.
One trend the broker suggests is clear is production is growing faster than demand, but for once the finger of blame cannot be pointed directly at China as it notes the US, Russia and Turkey all lifted steel production during the first six months of the year.
Also supporting the view China for once is not fully responsible is the China Iron & Steel Association (CISA), which says Chinese steel capacity is actually being overstated by analysts. It is forecasting real output for the year of about 410m tonnes, with domestic demand likely to reach about 400m tonnes.
Merrill Lynch suggests if this is indeed the case and exports are in line with CISA’s estimate of around 12m tonnes for the year (for the first half exports were 7.7m tonnes), its forecast of Chinese exports of between 20-30m tonnes will be far too high and Asian steel prices generally should enjoy a significant recovery.
Despite this the broker notes sentiment in the market appears to be softening, as a recent market survey by SSB’s The Steel Index showed less than 27% of market participants expect prices to increase over the next three months, down from more than 80% in the June survey.
This poorer outlook comes even as the European market in particular remains tight, which as GSJB Were notes is allowing producers to pass on cost increases. The broker notes some steel mills, particularly those in Japan, are looking for significant price increases of as much as US$500 per tonne, which though a big bite in one hit may succeed in the broker’s view simply because the tightness of supply means the market currently favours the sellers.
Steel industry consultant MEPS is not sure the tightness in European markets and the positive impact this is having on prices can last though, pointing out the tightness of supply is resulting in a lift in imports from other regions. This is helpful given European mills are currently playing catch up on orders, but MEPS suggests when the mills are back on track the higher supply will likely put downward pressure on prices. It expects this effect will become more visible in the fourth quarter or earlier if the mills are not able to achieve the price increases they are believed to be targeting.
MEPS also points to one other trend likely to be seen in coming months, a slowing in merger and acquisition activity. In its view the Mittal/Arcelor deal has made it less likely there will be additional deals in the shorter-term as companies have moved to become more difficult to acquire. As an example it notes the major Japanese players, Nippon Steel, Kobe Steel and Sumitomo Metals, who have acted to strengthen their cross shareholdings as well as apparently agreeing to top any hostile bid that is tabled for any of the three, while European companies have moved to buyback shares to make any acquisition more costly.
Factoring all this in, Credit Suisse notes the simple conclusion is it is too early to know for sure whether prices are correcting or simply reflecting the usual volatility of the European summer. The one thing the broker appears sure of is market participants should be set for further price volatility in the short-term.