Steel Prices Under Pressure

The Business of Mining - thebusinessofmining.com | June 1, 2010 | 10:46 am

“The world’s steel mills are ramping up production so quickly that prices in some markets are expected to fall 5% or more in June, and inventories are growing.

Mills in China, the biggest driver of global steel prices, and Eastern Europe are churning out record amounts of steel. The surging output comes amid signs that the world’s economies may not be on a strong upswing, prompting worries that supply will outpace demand and restrain prices just as they were beginning to rise.

‘The possibility of overproduction in the market is a concern,’ said Lakshmi Mittal, chief executive of ArcelorMittal, the world’s largest steelmaker.

Annualized global steel output, based on a record April, is expected to climb to 1.5 billion metric tons from about 1.25 billion metric tons in 2009. At the forecast 2010 rate, output will exceed consumption of 1.3 billion metric tons, according to the World Steel Association.”

Source: Wall Street Journal, June 1 2010


Observations:

  • According to the world steel association, capacity utilization of steel mills is up to 80%. The increased supply of steel is preceeding an increase in demand.
  • Economists warn for an iron ore price bubble (FT, May 31). Prices are rising much faster than mining costs in the past months.

Implications:

  • For mining companies, the accelerated ramp-up of steel production is a positive development. Miners can ramp up production profitably quicker, and will thus be prepared for a potential new demand surge from China and India.
  • Oversupply might reduce steel prices in the short term and will dampen price increase in the medium term, but will quickly be forgotten if demand picks up as expected.

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