LONDON Oct 29 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."
BETS ON CHINA
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
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]
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)