ANALYSIS-Steel demand seen suffering until mid-2009

LONDON, Oct 29 (Reuters) - Global demand for steel will weaken over the next few months as turmoil in financial markets tears into the real economy, while China remains key for a recovery in demand, which is not expected until mid-2009.

Steelmakers across the world, including majors like ArcelorMittal ISPA.AS, Russia's Severstal CHMF.MM and many Chinese mills, have announced sharp output cuts since September in response to contracting demand and plunging prices.

“The outlook for steel demand in the short-term appears very weak, with little foreseeable strengthening in consumer activity,” analysts at Barclays Capital said. “With this picture in mind, it is difficult to see steel demand picking up any earlier than the second half of 2009,” they said.

Analysts say underlying steel demand from emerging markets, fuelled by infrastructure spending, will not fade away overnight but projects could be put on hold or delayed as tightness in credit markets restricts the availability of finance.

In the $800 billion steel industry, almost all construction projects are financed by credit facilities or bank loans.

“Our main problem has been the credit squeeze,” said F.D. Baysal, president at U.S.-based steel traders Seba International. “We were forced not to sell or to reduce our quantities, thinking our customers may not be able to pay.” “Our feeling is that this will continue for at least another six months,” he said.

It was all doom and gloom at an industry conference in Germany last week, with producers, stockists and traders complaining about the scarcity of credit and the difficulty of financing the unwanted inventories.

Traders said there were around 3 million tonnes of stocks waiting at ports, with yet more on vessels in the Middle East and Black Sea region, as a result of falling demand.

“In Dubai the projects are going on but they are buying whenever they need it and at the very last minute,” managing partner Sujat Shetty at Ghantoot Building Materials, a Dubai based supplier, said. “New projects are on hold and the best strategy for stockholders is now to liquidate,” he said.

With the financial crisis deepening in the global markets and banks in need of cash more than ever, tight credit conditions for construction projects looked to continue in 2009.

“There is a sharp fall in steel industry transactions,” said Zafer Yucebas, account manager at The Economy Bank in Netherlands, a subsidiary of Turkey-based TEB. “We’re being much more selective, both in terms of the project and the client.”


Despite the grim situation, several analysts still bet on the growth story of the emerging markets, particularly China.

“China remains key,” analyst Jim Lennon at Macquarie Bank said. “We are still thinking that Chinese demand could grow modestly by 5 percent or so in 2009, therefore the total demand for steel will be a small positive,” he said.

In the developed world, the picture looks darker. Construction starts on U.S. homes fell to a new 17-1/2 year low in September while in Europe, construction activity in Germany declined for the seventh month in a row in September, while in Britain new car sales fell by a fifth in the same month.

The European Confederation of Iron and Steel Industries expect steel consumption to shrink next year from 2008, saying the construction automotive sectors will be hardest hit.

“In line with the darkened macro-economic outlook, the latest forecasts for production growth in the steel-using sectors...signal a significant deterioration in activity over the coming quarters,” Eurofer said.

On Wednesday, Nippon Steel 5401.T, the world's second largest steelmaker, booked a 13 percent fall in quarterly profit.

Analysts say the outlook for Nippon and the world's third largest steelmaker, JFE Holdings 5411.T, looks increasingly tough as Japanese carmakers and other manufacturers have began cutting back on their production plans. [ID:nT137237]

SUPPLY RESPONSE The production cutbacks from the industry could help the market stabilise and limit the free fall in prices, once the financial storm is over.

“Consolidation at least gives steel producers some ammunition to try and better match supply with demand,” analyst Leffrey Largey at JP Morgan said.

“In the past, the steel industry was much too fragmented to allow steelmakers to even contemplate aggressive production cuts like we are witnessing today.”

According to 2007 figures from the industry body World Steel the top five steelmakers including ArcelorMittal, Nippon Steel 5401.T and JFE Holdings 5411.T produce nearly 20 percent of the world's total annual output of 1.34 billion tonnes.

Traders say production cuts alone will not be enough to prevent the steel price and earnings from falling but could limit the slide. Prices have more than halved since July, with billet prices at around $300 per tonne from above $1,250. (Reporting by Humeyra Pamuk, editing by Anthony Barker)