* Supply disruption in U.S., Turkey tighten supply
* U.S. prices spike after bleak first half
* Record Chinese output puts limit on further price increase
By Silvia Antonioli
LONDON, July 31 Stressed steel producers are breathing a sigh of relief as prices bounced unexpectedly from 3 1/2 year lows in recent weeks, but excitement is unlikely to last as oversupply is waiting to crimp the sector.
Prices of the alloy rose, in what is typically a slow month, in leading producer China, the United States and even austerity-stricken Europe.
Broad stabilisation of the global economic backdrop and regional supply disruptions are the main catalysts for current gains, with steel demand often cited as an industrial indicator.
"Right now it is evident that there is a global pick up," a Swiss-based steel trader said. "But no one can think that the market has radically changed, because there is still too much production, especially in China."
Spot prices in Europe rose around 5 percent in the last two weeks after over 20 weeks of decline, while major producers and fabricators such as ArcelorMittal and Italy's Marcegaglia announced prices increases for July, August and September.
The increase, unusual for the sleepy summer months, is due to rising raw material prices and a mild demand awakening as slightly more confident end-users restock, Marcegaglia said.
"There is some kind of acceptance among buyers that prices are going up. They are prepared to pay a bit more now," said Meps steel analyst Jeremy Platt.
"Export quotations coming into Europe have increased, so that gives some room to manoeuvre to domestic producers."
A margin squeeze in the last few years has pushed some mills in Europe, Russia and Ukraine to curtail output in recent months.
This, coupled with a strike this month at Isdemir, a major Turkish producer, has also helped create tension on the supply side, traders said.
"For the first time in a long time there is no oversupply. But how long is this going to last? One month? Two? The increase was triggered by temporary rather than structural conditions," a European trader said, adding that any sustained price increase for the construction material would lead producers to boost output once again.
POWER BACK WITH THE MILLS
After a bleak first half this year, prices in the United States and North America spiked.
Structurally, the U.S. steel market is in better shape than in Europe as it is anchored off stronger economic growth.
Steel demand however, underperformed the economy in the first half - normally the strongest - and prices started to rise for the first time this year only in June after technical issues reduced supply at some major steelmakers such as AK Steel and U.S. Steel.
The supply cuts lengthened lead times for delivery of steel and pushed anxious buyers to put their orders through.
Domestic producers seized the opportunity to announce price increases.
"For the first time this year the power is with the mills," a U.S.-based steel trader said.
"After six months of falling prices inventories were depleted and buyers couldn't wait any longer. At the same time I do think demand has improved as well. The question is how long is it going to last?"
A recent trade case launched by U.S. steel pipe makers against imports from nine countries is also supporting prices of domestic flat steel products as importers reduce shipments fearing retroactive duty.
Prices in top steel producers and consumers in China and in Asia have rebounded in July, seasonally a slow period for the market, helped by an increase in raw materials and on the back of restocking by end-users which pushed some leading producers to raise prices for July and August.
The run-up however will be limited by heavy oversupply: while demand growth for the alloy is slowing together with the economy, China continues to churn out steel at a record rates.
This is mostly because Chinese authorities help state-owned steel plants to maintain strong growth in an effort to keep employment high and avoid social unrest while private steel mills do not want to lose their market share.
As Chinese supply still swells it will continue to pour out into other regions when there is a chance, subduing chances of upturns there.
"We will see more swings but no sustainable growth until the economy picks up strongly: China will always provide a ceiling to the rest of the world," the U.S. trader said.