Natural calamities that have occurred in Asia recently will create some pressure on prices till the end of December, according to the investment banker
Investment bank Goldman Sachs has said that it expects steel prices to remain under pressure till the end of this year due to adverse weather conditions in Asia, China's energy-conservation measures, rising inventories and lower capacity utilisation in the developed world, resulting in sluggish demand.
"Due to uncertain weather conditions, the Asian construction sector generally sees less activity in the period of July-September and so prices for the metal can go down. However, natural calamities have occurred late in the period, which will create some pressure on prices till the end of December," said Goldman Sachs in a report.
The Asian construction sector consumes about half of the region's steel production.
In south and south-east Asian countries, demand for steel from the construction sector has been largely affected due to natural calamities which occurred recently. There has been heavy flooding in many countries like China, India, Pakistan, Vietnam, Thailand and Indonesia, the report said.
Even countries like Korea, which have not been affected by natural disasters, are seeing a slowdown in construction activity, Goldman Sachs added.
According to the World Steel Association (WSA), crude steel production in China, the world's largest producer and consumer of the metal, fell 5.9% during September to 47.9 million metric tonnes (MMT) from the same month last year. The WSA said that Japan's crude steel output stood at 9.2MMT in September, up 11.7% compared to the same month last year, while South Korea's crude steel production increased 3.2% to 4.7MMT.
Energy-conservation measures in China have also forced steel producers to curb production. In addition, steel consumption in that country will be affected as the Chinese government has decided to limit multi-home ownership, said analysts. Construction accounts for half of the steel demand in China.
"Steel demand in China has come down due to a slowdown in the construction sector. The pace of growth has fallen but there is still some demand, so steel prices will not be affected adversely at least till December," said an analyst from Elara Securities (I) Pvt Ltd.
Asian steel consumption is running at an average utilisation rate of 86% against 69% for the US and 73% for Europe. Even capacity utilisation rate of Japanese steel majors like Nippon Steel Corp and JFE Steel Corp during July to September 2010 was 96% and 86% respectively, against 77% for US Steel and 71% for ArcelorMittal, the world's largest steelmaker. Higher utilisation rates in Asia are helping to offset some seasonal weaknesses, the report said.
"Steel demand in Europe and the US is recovering at a very slow pace which is putting pressure on prices. Lower capacity utilisation by European and US steel majors indicates muted demand in these countries. Europe particularly may remain weak due to the summer season and as the holiday season begins by December," an analyst from a Mumbai-based research firm said.
ArcelorMittal also painted a bleak picture for steel consumption during the October to December period, due to slowdown in demand in China, muted recovery in developed countries and rising raw material cost.
The steel major said it expected October-December EBITDA at $1.5 billion-$1.9 billion, against $2.26 billion in the July-September period, due to weak realisation.
"Our outlook for Q42010 remains cautious as the expected higher input prices continue to work through the business and demand remains muted, though with some regional differences," said LN Mittal, chairman and chief executive, ArcelorMittal, in a presentation to investors.
Goldman Sachs believes that lack of confidence among buyers may also put pressure on steel prices till December.
"Our channel checks with traders suggest that while demand in certain
segments/markets remains strong, there is a crisis of confidence leading to a buyers' strike," the investment bank said.
However, Goldman Sachs is optimistic about steel prices post December due to downward correction in inventories and rebound in construction activity, particularly in Asia.
"Furthermore, there is a belief that construction activity is only delayed, not cancelled. When the weather improves, one can expect demand to recover even stronger than usual due to all the pent-up demand for construction. If anything, Asian governments may have to spend on reconstruction activity after the bad weather," the report said.
Inside story of the National Stock Exchange’s amazing success, leading to hubris, regulatory capture and algo scam