Commodities | Nov 07 2006
By Chris Shaw
According to steel industry consultant MEPS the outlook for steel prices depends on your investment timeframe, as until around the middle of next year it sees prices weakening from current levels before reversing and strengthening in the latter stages of 2007.
The short-term view is partly a reflection of seasonal factors, as both MEPS and Merrill Lynch point out leading into the northern winter there are few catalysts for stronger prices as demand generally eases at this time.
But other factors are likely to come into play in the next few months, including an improvement in nickel supplies that MEPS expects will see prices for the metal drift down. This would reverse the recent trend of higher alloy surcharges resulting from surging nickel prices, so allowing for stainless steel prices to ease on the back of a forecast 9% increase in production next year.
The group is forecasting the end of the year as coinciding with the end of peak cycle prices, with its forecast for mid-2007 nickel prices of around US$24,000 per tonne compared to more than US$30,000 per tonne now.
The group also sees potential for further flat and long product price falls as the North American market in particular is being flooded with imported product at the same time as consumers are drawing down their stock levels. Credit Suisse agrees, noting it is higher exports from China that have impacted on the European and US markets, so forcing prices down.
UBS points out the impact currently is being felt most in flat product markets, but any price weakness here is likely to flow through into long products as well in coming months.
Paving the way for higher prices next year in Deutsche Bank’s view is the improving fundamentals in the Chinese market, where production growth is slowing and consumption is increasing.
The broker expects additional output in China in 2007 of 40m tonnes, down from its forecast of production growth of 75m tonnes this year. Next year’s increase is also expected to be slightly below the level of consumption growth, while it sees little increase in production in the Asian region as few new products are slated to come on stream. The broker therefore expects prices to strengthen through 2007, especially in Asia as prices in the region appear to have already corrected, something that it suggests is yet to happen in the European and North American markets.
Credit Suisse agrees with the more positive view on China, as the broker points out prices in that market are already ticking up as there are some signs of improvements in terms of tighter markets and pricing power. It also is optimistic on global prices in the medium-term, as it sees potential for a tightening in global markets thanks to further cuts to inefficient capacity in the Chinese market and production cuts in both Europe and the US.
Merrill Lynch takes a similar view in suggesting any price weakness in coming months is likely to be limited as production cuts begin to impact, the broker noting US Steel and Arcelor Mittal are among major players to flag cuts to output.
The broker notes industry consensus is split as to the precise timing of any recovery in prices, with some seeing improvement as early as the second quarter next year and others looking to the second half of 2007.
MEPS is in the latter camp in terms of better prices in the North American and European markets, though it suggests Asian prices may not recover much unless mills introduce strict output controls to limit production.