Steel Prices To Decline Further - Report

Steel prices may decline further on further falls in raw material costs such as iron ore and coking coal, according to HSBC Global Research. The
investment bank expects prices of global hot rolled coils (HRC) and rebar to decline 43% and 49%, respectively, in 2009.

“We assume further downside risk for steel prices, as expected raw material price declines of 30% in iron ore and 60% in coking coal will partly accrue to customers, which are in an excellent position to negotiate lower prices,” HSBC said in a recent report.

According to the investment bank, steel manufacturers would have little choice other than pass on the benefits of lower material costs from April to customers, given the dire demand outlook.

“We do not expect demand to strengthen significantly before mid-Q2 2009 and expect that a substantial portion of lower raw material costs will initially be pocketed by customers,” HSBC said. The investment bank forecasts the global crude steel production of 1.243mt in 2009, a 7.2% contraction from 2008, but expects the output to rebound in 2010, with a 3.6% growth. Accordingly, HRC and rebar prices would rise 11% in 2010, it noted.

“Supply cuts have been quick and decisive, so inventory may be better controlled, allowing a more rapid recovery and we expect to see the trough in Q1 2009. Growth rates could turn positive by Q4 2009 at the latest,” HSBC said.

“We expect 2009 to be the low point in the cycle, with global crude production down 7.2% year-on-year, split into falls of 3.4% for China and 9.4% for ROW (rest of the world). Production cuts are already close to trough levels seen in the mid-1970s/early 1980s, which we take as a sign that we are close to the bottom,” the investment bank said. HSBC said, however, it does not see any parallels in the current state of the steel industry with that of 1930, even as the global economy in the midst of “the worst synchronised global economic downswing since the 1930s”.

“We think that the 1930s experience is unlikely to serve as a game-plan for the current downturn for two reasons. First, general steel production volatility was much higher in the 1930s than after the 1970s as year-on-year production increases frequently touched the 100% mark and, likewise on the downside, year-on-year declines at or in excess of 50% were not that rare,” it said.

“Given the high dependency of steel consumption on fixed asset investment (FAI) and industrial production, it is unsurprising that this downturn has already been much worse than 2001-02: production cuts across the globe resemble those seen in the mid-1970s and early 1980s, both of which were times of deep and protracted global recessions,” HSBC added.

Source: Economic Times