European steel prices continue upwards

Edited by the Engineeringtalk editorial team May 18, 2006

European steel prices now seem likely to increase by more than market participants had expected, even just a few weeks ago.

European steel prices now seem likely to increase by more than market participants had expected, even just a few weeks ago.

Demand on the mills and for imports is strong.

Real consumption of steel is growing but it has become clear that stock-building is taking place - and this raises the possibility of a speculative bubble that could bring problems later.

After a slow start to the year, prices across Western Europe have risen strongly in the last few months.

Comparing May prices in Germany with those recorded for January, hot rolled and cold rolled coil have both increased by Eur 30 per tonne, galvanised by Eur 50 and hot rolled plates by between Eur 70 and Eur 100.

Wire rod and medium sections moved up by Eur 50 and 60 per tonne, respectively.

In some other EU countries the price increases have been far larger.

Values in Italy began the year at a generally lower level than most member states - but they have risen more strongly and for some products now exceed prices elsewhere.

The European Commission's latest survey of business and consumer confidence shows that economic sentiment increased in April for the fifth month in a row.

Particularly strong was the advance in new orders received by the manufacturing sector.

Construction industry sentiment also grew.

As foreshadowed in last month's MEPS European Steel Review, steel mills have now announced plans to increase prices for many of their products with effect from July.

ThyssenKrupp, Arcelor, Corus and Salzgitter are among those who have confirmed their intention to seek price rises of up to Eur 50 per tonne from July.

There is little doubt that they will succeed, at least in part.

The mills are keen to take advantage of the improving market.

This is partly to offset rising costs.

Although iron ore prices for 2006 had still not been settled at the time of writing, they seem likely to increase by at least 10% and perhaps as much as 15 or 20%.

Energy, alloys, zinc, graphite electrodes and other steelmaking inputs are also escalating.

However - worryingly - some of the current increase in steel demand is undoubtedly the result of speculative stock-building.

EU inventories fell sharply last year and were in need of replenishment.

Moreover, it is natural for buyers to place orders in advance of forthcoming price increases.

But the rebuilding of stocks can easily get out of hand.

One recent steel industry forecast is that real steel consumption in the EU may rise by 1.4% this year, but that apparent consumption - which includes stock-building - could go up by as much as 5.1% year-on-year in the second quarter and by a disturbingly high 7.1% in the third trimester - broadly in line with MEPS' estimates.

If the speculative bubble gets over-inflated, the outcome will doubtless be painful.

When they perceive that the run-up in prices is nearing its peak, speculators will stop buying and offload their stocks.

Prices will tumble - and the faster they rise on the way up, the quicker they will plunge on the way down.