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INTERVIEW - Steel capacity restarts excessive, weigh on prices

LONDON (Reuters) - Steel producers were too quick to restart idled capacity as demand remains weak and increased supply is putting downward pressure on steel prices, the chairman of a leading steel association said.

A labourer works inside a steel factory on the outskirts of Agartala, Tripura, September 3, 2009. Steel producers were too quick to restart idled capacity as demand remains weak and increased supply is putting downward pressure on steel prices, the chairman of a leading steel association said. REUTERS/Jayanta Dey

“Producers around the world very quickly ramped up their production, overfeeding the market,” said Mel Wilde, chairman of UK-based International Steel Trade Association (ISTA), which has 85 members, including divisions of steel giants such as ArcelorMittal and Corus.

Wilde’s comments late on Tuesday came after the chairman of the world’s top steel producer ArcelorMittal braced to say that he believes U.S. and European steel markets will not return to pre-crisis levels next year.

“There is not enough discipline overall from the producers to allow sustainable price increases or stability because everybody’s desperate to get more cash flow,” said Wilde, who is also the managing director of UK-based steel trader Metalloyd.

Steelmakers across the globe have begun to ramp up some idle capacity after months of around 50 percent capacity usage after slumping steel demand forced them to sharply cut output.

Increasing capacity utilisation was reflected in production figures. Global crude steel output in July reached its highest monthly level so far in 2009, although it was still down 11.1 percent from the same month last year.

“As they see the price in the world market above their production cost they start to meet the demand, or the perceived demand, with too much steel and bring the price down again,” he said.

“The most recent example is China,” Wilde said. “They met the demand that was out there with one month’s production very quickly and killed the demand.”

In China, physical steel prices have tumbled around 10 percent after hitting a 10-month high in August, when the output from the world’s top producer and consumer of the metal, jumped to a new peak of 52.3 million tonnes.

Metalloyd trades around 4-5 million tonnes of steel and steelmaking raw materials annually.

Several steelmakers have cited rising apparent demand, which they define as orders coming from middlemen and could be triggered by the depletion of stocks held by them, instead of actual demand from end-users.

Wilde agreed that orders have increased, but said the pace of the response was too much.

“Lack of discipline is leading to an unsustained recovery and I think it’s going to be like that until the end of the year and into next year,” he said.

As for consumption, there are pockets of buying but the market will have to wait almost a year for a solid recovery in end-user demand, Wilde said.

“There’s a huge amount of stockists in Europe alone and they have leftovers of some high-priced inventories in the warehouses. Even if they’re down 50 percent in their normal stocks the demand is not more than that,” he said.

“By the end of the first half of next year, I think it’s (the recovery) going to be probably sustainable. By then we’ll get used to how to deal with this crisis,” he said.

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