De­mand down so prices go up

But there’s a twisted logic to it

Finweek English Edition - - Companies & Markets -

IS STEEL GET­TING HOT AGAIN? Share prices of the main listed steel pro­duc­ers on the JSE – chiefly ArcelorMit­tal SA and Highveld Steel and Vana­dium – turned very cold last year, los­ing half or more in terms of value. But there’s been a strong come­back, par­tic­u­larly from ArcelorMit­tal, which has gained around 15% over the past week (to 9 June) and more than 40% over the past three months.

It’s not easy to see why against the rather dis­mal out­look for the in­dus­try and at a time when ArcelorMit­tal plans to in­crease prices. But for out­siders this can be a com­plex and at times con­fus­ing in­dus­try. It also moves fast, not only in terms of price in­creases and de­creases but in­ter­na­tional de­vel­op­ments.

For ex­am­ple, last week the in­ter­na­tional Mit­tal Steel Group said it had reached agree­ment with Spain’s gov­ern­ment to close its mills in that coun­try for a year. That’s a re­flec­tion of the pres­sure steel pro­duc­ers are un­der as de­mand evap­o­rates with the global eco­nomic down­turn.

Then a week later the Chi­nese Min­istry of Fi­nance an­nounced it would in­tro­duce ex­port tax re­bates of 9% on a num­ber of steel prod­ucts “in a bid to re­vive the frozen ex­port mar­ket”, ac­cord­ing to the au­thor­i­ta­tive Steel Busi­ness Brief­ing news ser­vice. It quotes traders say­ing the 9% re­bate will have a lim­ited ef­fect on the ex­port mar­ket, though it says Chi­nese ex­port prices could be low­ered to lev­els “ac­cept­able to most for­eign buy­ers”. So that does seem to have thrown a cat into the de­pressed steel ex­port mar­ket.

Closer to home, ArcelorMit­tal has been hit on the ex­port side, one of the rea­sons for it hav­ing to re­trench con­tract work­ers and cut pro­duc­tion. Yet it says from July flat steel prices will in­crease be­tween 4% and 5% and long steel prices be­tween 5% and 6%. CEO Nonku­l­uleko Nyem­bezi-Heita says since Septem­ber last year SA steel prices have de­clined more than 60% and this will be the first in­crease since then.

How­ever, a re­port by Jo­han de Kock, head of eq­uity re­search at Metropoli­tan As­set Man­agers, says: “Prospects for a re­cov­ery in base metal prices are som­bre for at least the rest of 2009 and it could take years be­fore metal prices re­cover sus­tain­abil­ity to lev­els seen be­fore the global re­ces­sion.”

Base met­als are an in­put for steel pro­duc­ers. For ex­am­ple, Highveld Steel gets ore for its steel­works from the com­pany’s mine. It didn’t men­tion pos­si­ble steel price in­creases in its de­press­ing re­sults for first quar­ter 2009, where head­line earn­ings re­duced to R130m from R562m in last quar­ter 2008.

So why is ArcelorMit­tal now rais­ing prices in the SA mar­ket? “You need to re­mem­ber our price-set­ting mech­a­nism is fairly for­mu­laic, one over which we have lim­ited con­trol. We mon­i­tor prices of equiv­a­lent steel prod­ucts in four coun­tries – Rus­sia, China, the United States and Ger­many – av­er­age them out and ap­ply the US dol­lar/rand ex­change rate to them,” says Nyem­bezi-Heita.

Okay, so ArcelorMit­tal can’t con­trol de­mand (un­less per­haps it re­duces prices sig­nif­i­cantly) and says it also has “lim­ited con­trol” over prices. What gives this writer com­fort on a flight is know­ing that while the air­craft might be on au­topi­lot the real peo­ple pi­lots can over­ride the ma­chine if con­di­tions

On auto-pi­lot? Nonku­l­uleko Nyem­bezi-Heita

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