At the height of every summer, Europe’s manufacturers slow down, their workers go on holiday, and some of their factories even close. But, this year more than any other, the continent’s steelmakers are hoping the annual seasonal lull is the only reason for a dip in the metal’s price.
This 4 per cent fall since June has cut short a rally in recent months and raised questions about the strength of a recovery in the sector that is still grappling with the collapse in the commodity’s value last year.
A combination of global oversupply, low raw material prices and a flood of cheap Chinese exports created some of the toughest market conditions for steelmakers since the financial crisis.
Recently, though, there have been signs of improvement: since touching a low of €313 a tonne in February, average EU monthly prices for hot rolled coil shot to €444 a tonne by June, according to the consultancy Meps. This month, however, this benchmark sheet steel product slipped in price to €426 a tonne.
Nevertheless, market fundamentals have “shifted dramatically” in favour of steelmakers, according to Mike Shillaker, analyst at Credit Suisse. He says the run-up in prices is partly down to buyers of steel refilling their warehouses after running supplies down.
“We were in a major destocking period for a good year and a half, triggered by the collapse of oil and iron ore [prices] in the middle of 2014,” he explains. “Inventory was depleted.”
Investors will be looking for further signs of encouragement when ArcelorMittal, the world’s biggest steelmaker, reports half-year results on Friday.
There is already some cause for optimism. Last week, SSAB of Sweden exceeded analyst expectations when it posted second-quarter earnings of SKr1.58bn ($183m) before interest, tax, depreciation and amortisation.
However, much will depend on the behaviour of China, which makes almost half the world’s 1.6bn annual tonnes of steel and is accused of dumping excess material at lowball prices as its domestic consumption cools.
Chinese shipments into the EU jumped by more than 50 per cent last year and remain “elevated”, according to Eurofer, a trade association.
But China’s domestic and export steel prices are now at more stable and “acceptable” levels, says Seth Rosenfeld, an analyst at Jefferies. As these imports lose their price advantage, the impact on European producers should be less harmful than seen in late 2015.
Even so, companies in the EU have continued to cede market share in their home region to players from countries such as Japan, South Korea, Iran and Russia. Total imports by EU countries increased nearly a quarter in the first three months of 2016, according to Eurofer, while apparent steel consumption grew just 3.1 per cent.
One hope for protection against these flows is the EU’s newly found combative attitude towards unfairly traded steel.
Steelmakers have long criticised Brussels for its slower and less robust regulatory approach compared with the US. But EU authorities have expanded an investigation into Chinese hot rolled coil shipments to a further five countries, covering about 80 per cent of all European imports of the product.
“Anti-dumping is kicking in quite strongly,” says Alessandro Abate of Berenberg. “If there’s further implementation of anti-dumping [measures], this can boost prices”.
However, any benefit may be offset by the potential economic fallout from the UK’s vote to leave the EU: it has already led Jefferies to halve its estimates for steel demand growth in the second half of this year and 2017.
A degree of self-help could yet be on the way from a possible wave of merger and acquisitions in Europe. ThyssenKrupp and Tata are in talks over a joint venture that would create the continent’s second-largest steelmaker, ArcelorMittal and Marcegaglia are competing with other bidders for control of the Italy’s large Ilva plant.
Fewer but bigger players in Europe could lead to supply restraint and less aggressive pricing. “In the US, proactive supply discipline in times of weaker demand has supported much higher prices. The EU has never seen that in the past, so it’s compelling,” says Mr Rosenfeld of Jefferies.
In addition, Beijing has pledged to shut down unneeded plants.
Whether these factors combined will be enough to prevent another precipitous drop in European prices is likely to become more evident in late September, say analysts, once the wheels of the economy pick up speed again.