Summer is coming

There is a popular saying in HBO’s Game of Thrones: Winter is coming! Although we, as the audience, are not yet fully aware of what winter is bringing, the anticipation of it is enough to make us nervous. Considering the current market conditions, for the steel industry, the summer period is what the winter is for Westeros.

Last month’s blog article discussed two different standpoints on the likely trend prices will follow and one scenario became real already:

The Chinese steel market, which sets the trend for global steel prices, started to indicate price declines and these decreases have spread across the global markets including Turkey, causing a turning of the tide. The sudden and sharp price declines in China have resulted in sluggishness in the markets and in a slowing down of the steel trade.

The current scenario is quite depressing. Prices have been declining since early May; however, there are no price levels heard in the market for scrap, which is one of the main indicators of the steel price trend. Everybody has an opinion about the likely new scrap price levels but nobody has heard anything about scrap offers, let alone any bookings. Accordingly, market players are experiencing a great amount of uncertainty and trading activity throughout the entire supply chain from raw materials to finished steel products has slowed down and, on top of this, summer is coming. The summer period has in recent years become a time of stagnancy for the steel markets since it coincides with the month of Ramadan. Given the summer holidays in Europe, annual maintenance works in major industries and the month of Ramadan, market players do not hold a positive view of the prospects for the summer months. The main question is how painful the summer will be.

Nobody, not even the Chinese themselves, knows how much China needs to export. However, news coming from China indicates tougher price negotiations ahead and all signs point to the depressing nature of the current scenario. In May, China’s biggest private steelmaker Jiangsu Shagang urged the Chinese government to support the country’s steel exports. The company officials stressed that there is a global export market for Chinese steel products and that there is demand for Chinese products overseas, and asked why they should stop selling while demand exists. Meanwhile, Chinese suppliers have failed to keep their billet export price levels stable: their prices fell to $300/mt in the second week of May, while they increased in the following week amid the conclusion of sales to the South Asian markets. When a supplier has lower inventory he follows a continuous uptrend in his prices, but ex-China billet prices increased by $10/mt in mid-May and then switched to a downwards trend.

While the whole world is trying to ban China from the global steel market with duty rates reaching almost as high as 500 percent, Chinese prices are still the only ones being discussed in the markets. For instance, although Turkish buyers, whose contracts with Chinese sellers were cancelled when prices started to increase, are reluctant to conclude purchases of Chinese steel, they still use Chinese prices as a starting point in their negotiations, just as buyers in other international markets do. Buyers continue to ask suppliers to adjust their offers in line with Chinese prices. The legitimacy of such requests can be discussed separately; however, the most important thing for the buyer is to cut production costs. The main question is whether China, whose target markets have been reduced due to the measures taken by the rest of the world, will become even more aggressive in the markets in which it has managed to maintain its presence.

From the Chinese viewpoint, the answer lies in the question posed by the Jiangsu Shagang officials: why they shouldn’t they sell if there is demand for their products? Speaking at the SteelOrbis 2015 Fall Conference & 73rd IREPAS Meeting held in Rome on October 5 last year, Li Xinchuang, vice secretary general of the China Iron and Steel Association (CISA), said that the antidumping cases initiated against China’s exports would not stop its export activity since customer demand will prevail over the negative effects of such trade cases. Many changes in the market have been seen since last October, but what is constant is China’s attitude about their exports. Thus, it is not wrong to assume that China will cut its prices aggressively in line with its need to export.

It is evident that, during the summer period, demand will be weaker compared to the rest of the year, due to month of Ramadan, the summer holidays, religious holidays in certain regions, and annual maintenance works. Another evident fact is that competition will become even fiercer as a result of shrinking demand. Considering all these factors, the global steel markets are unlikely to see any improvement and the only thing we can do is hope that losses will be kept to minimum levels.

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