Current EU steel prices are unsustainable

Edited by the Engineeringtalk editorial team Aug 23, 2004

Steel basis prices in Europe have seen remarkable surges this year, reports MEPS (International).

Steel basis prices in Europe have seen remarkable surges this year, reports MEPS (International).

Current values for many products are at historic highs.

But an analysis of prices over the longer term shows that the speed at which the recent increases took place is not entirely without parallel.

Looking at the German market for hot rolled coil since 1985, only once over that period has there been any rise in prices that matches the 45% jump seen in the last 12 months.

That was between July 1999 and July 2000, when the negotiated basis price of hot rolled coil leapt from the equivalent of Eur 215 per tonne to Eur 337 per tonne - a rise of over 56% that was the result of a shortfall in EU internal supply and an absence of imports.

However, that price spike came from the lowest point that German hot rolled coil prices reached in the last two decades - after a fall of more than 20% from mid 1998.

And it was followed by a drop of more than 20% back to Eur 261 per tonne by the middle of the following year.

Only rarely in the last 20 years have basis prices for hot rolled coil exceeded Eur 350 per tonne.

There have been occasional dips down below Eur 260 per tonne and rather more frequent peaks up to about Eur 360.

But for most of that period they have been in the range Eur 260/310 per tonne: this is what might be termed the "normal" price band for hot rolled coil in Germany and other EU countries.

Today's price of Eur 450 per tonne is altogether extraordinary, as it is so far outside hot rolled coil's traditional trading range.

Prices for medium sections in Germany show a somewhat different pattern.

Taking basis prices recorded for July each year, today's level of Eur 325 per tonne is not without precedent.

In the mid 1980s, when the EU Commission enforced minimum prices and production quotas as part of its "anti-crisis plan" for the steel industry, sections' prices were higher than they are today, at the equivalent of Eur 336/347 per tonne.

Since then, sections' prices have shown very dramatic swings.

After a peak in 1989, thanks to strong demand, they plunged as low as Eur 165 per tonne in 1996 and remained in the doldrums below $200 per tonne for several years, before recovering to Eur 210 in mid 2002.

This stagnation is somewhat surprising in view of the consolidation of the industry that took place over that time: a number of producers amalgamated their sections businesses and several others left the market, resulting in a decrease in excess capacity.

German sections' prices have soared by just over 60% since this time last year - a rate of increase that is unmatched in the last two decades.

Adding the current scrap surcharge on to today's basis price takes the value to about Eur 375 per tonne - above historic highs and well outside the product's "traditional" trading range of Eur 165/260 per tonne.

Maybe we should begin to adjust our thinking about what a "normal" price range for steel products should be.

Although everyone agrees the recent rapid climb has been unprecedented, there is no consensus about whether, when or by how much prices will come back down again.

Nevertheless, from a historical standpoint, current values look unsustainable.

MEPS has already heard some steel company executives dropping hints about an end to the upward surge.

They will not want the bubble to burst too dramatically, but may be hoping to achieve a soft landing.

All MEPS' latest forecasts, which can be purchased from the company's website, indicate a significant fall in prices in 2005.