Falling demand and prices: what are steelmakers doing?

Posted on 24 October 2008

Source: SEAISI
A slowdown of steel demand in the global market during the third quarter of 2008 has led to a dramatic drop in steel prices. After peaking in July/ August this year, global demand for steel nosedived during September and there is no sign of any improvement to the end of the year. Price levels will continue to be under pressure at least for the short term. World Steel Association reported a sharp drop of 50% in the export price of US shredded scrap within two months, from USD 630 per tonne in August to USD 312 per tonne in October. Price of reinforcing bar dropped by 10% within a month to USD 975  per tonne (FOB) in October. Slab price, however, remained relatively unchanged since July, registering USD 1,085  per tonne (FOB) in October. Meanwhile, price of hot rolled wide coil was USD 1,065  per tonne (FOB) in October.

Graph 1 : Movement of scrap prices vs billets and slabs
Source: World Steel Association

Graph 2 : Changes in prices of billets and long products
Source: World Steel Association

Graph 3 : Changes in prices of slabs and flat products
Source: World Steel Association

As a consequence of the sharp drop in steel prices, many steel producers are cutting back output temporarily. The world's largest steel maker, Arcelor Mittal announced in September that it planned to cut production by as much as 15% to support prices. Early October, Ukrainian steel maker, Azovstal reduced liquid steel output by 19.3%. Europe's second largest steel maker, Corus, owned by India's Tata Steel, announced that it was taking steps to adjust its production in light of the current situation. Severstal, Russia's largest steel maker slashed its production in October by 25-30% at its plants in Russia, Italy and US. Magnitogorsk, Russia's third-largest steel maker, also cut its October schedule for rolled steel production by at least 15% to 850,000 tonnes. Zaporozhstal, Ukraine's leading steel maker reduced its liquid steel output by 5% to 3.2 million tonnes.

In North America, many steel producers are cutting steel output as well. The American Iron and Steel Association (AISI) reported that for the week ended October 11, production was down by 3.8% from the previous week. US Steel Corporation will idle one of its two blast furnaces it operates in Canada at the end of October.

In China, around 70 Chinese steelmakers met to discuss how they should deal with the weak market. Cutting production is one of the solutions. Additionally, they also decided to postpone the commissioning of new projects and to strengthen cooperation with upstream and downstream users. Shougang Group, Hebei Iron & Steel Group, Anyang Iron & Steel and Shandong Iron & Steel, all agreed to cut output by 10-20% in the first week of October. Bhushan Steel Ltd. also planned to stop its purchasing of raw materials for steel production and cut inventory over the next three months. China's largest steel producer, Baosteel Group will also halt its production over the next three months.

In the meantime, export of steel from China has begun to surge registering 6.67 million tonnes in September, an increase of 50% over the previous month. In contrast, its export from January to September registered 48.5 million tonnes, down by 2% y-o-y.  The slowdown in demand in the domestic market may compel many steelmakers in China to look more towards the export market to absorb their excess output, thus putting further pressure on the steel producers in the rest of the world.

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