Why is European steel production decreasing?

Why is European steel production decreasing?

European steel production fell for a sixth consecutive month in July as European steel producers reduced output to offset rising raw material costs. Data released from the International Iron and Steel Institute (IISI) show that production in the 25 members of the European Union (EU) decreased 9.4 percent year on year to 14.4 million metric tons in July. High inventory levels through the end of 2004 and in the first few months of 2005 set the stage for the European steel market's current depression. The excess inventory temporarily suppressed demand for steel and caused downward pressure on prices. Europe's benchmark steel prices plunged 33 percent this year. This is the steepest decline since 1998. Nevertheless, global steel consumption remains good, with further above-trend growth projected for 2005. IISI forecasts that in 2005 total global consumption for finished steel products will exceed 1 billion metric tons for the first time ever. Consumption is expected to amount to 1.05 billion metric tons in 2006, IISI adds. IISI indicates that apparent steel consumption will likely fall in several European countries and the US in 2005 due to slower economic growth. Last year's unprecedented steel prices forced many customers to order larger quantities of steel than they needed in anticipation of future price increases. Therefore, excess inventory levels built up in the steel supply chain. This phenomenon has affected the European market. In response, major European steel producers reduced production to balance supply and demand and to shore up increasing raw material costs. Luxembourg-based steelmaker Arcelor, which agreed to pay record prices for raw materials such as iron ore and coking coal this year, tried to mitigate those costs by cutting production. Mittal Steel, the world's biggest steel producer, will also cut its European steel output by 1 million metric tons in autumn. At the same time, Mittal is looking to acquire assets in Ukraine and Turkey. Other European steel producers – namely Corus, ThyssenKrupp and Salzgitter – will also follow the same path. Following these production cuts, European crude steel production is expected to reach approximately 187 million tons in 2005, down 3 percent compared to 2004. Steel making in non-EU European nations is expected to increase around 1 percent this year.