Demand down so prices go up
But there’s a twisted logic to it
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