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Cheap Steel Floods the Market Driving Prices Down

Steel manufacturers in Europe and Asia are facing mounting pressure due to an increase in cheap imports from Russia and Ukraine, which are enjoying weaker currencies.

Cheap Steel Floods the Market Driving Prices Down

China, the world’s largest steelmakers is also at the forefront of manufacturing excessive amounts of steel, creating a surplus in the world markets.

The availability of cheap raw material combined with a less than strong demand will serve to keep the prices on the global market low. Steel prices are already weak, their lowest since 2009; this is a situation that could cause producers to adopt protectionist measures to protect their own interests.

R.K. Goyal, managing director at Kalyani Steels India said, ‘Some of our customers are asking for a large reduction in prices. We are feeling totally hopeless and I am not sure we will be able to survive.”

Steel exports from Russia and Ukraine increased to 46.4 million tons in 2014 while China pushed out an all-time surplus of 93.78 million tones.

Dmitry Popov a Commonwealth of Independent States consultant at CRU said, “One might legitimately ask whether Russia and Ukraine are rapidly becoming like China in the steel export markets, in terms of their impact on price.”

Although some tax rebates have been eliminated, China is still expected to continue exporting as much as 90 million tons of steel throughout 2015 as a result of surplus and low demand domestically, according to the Iron and Steel Association.

Steel from China may continue to be $5 per ton cheaper compared to other suppliers. However, Russian producers are now increasingly able to match or go beyond these prices, according to the head of the Iron and Steel Institute in the Philippines, Roberto Cola.

Cola also said that China’s main competitor would be Russia, which is also faced with a steel glut. However, its China’s proximity to the rest of Asia and the availability of regional free trade agreements give China a certain advantage over Russia.

Last year, the Philippines was the third largest importer of steel from China but also imports from Russia.

Even then, Russian exporters have a better advantage over China when it comes to the European market, more so due to the weakening of the ruble.

‘Presently, raw material from Russia is probably the most sought after foreign steel within the EU due to the weak ruble,’ Jeremy Platt an MEPS analyst said.

Over the past year, the value of the Russian ruble has dropped by almost half against the dollar. Meanwhile, the Ukrainian currency, the hryvnia has dropped by more than 60%, causing the price of steel to decline to an all-time low.

Although the Ukraine can lower its prices, Russian manufacturers have an upper hand to increase their exports.

At the start of the year, the price of hot-rolled coil from Russia and Ukraine dropped to $435 a ton, which was $10 lower than Chinese exports.


Increasing protectionism

As exports increase, the share prices of steel companies in Russia and China continue to do better than their competitors mainly from South Korea and Luxemburg.

However, the global surplus is paving way for protectionist actions already in Indonesia, India and Turkey.

Andy Laptev, the corporate strategy head at Severstal said, “We are definitely seeing a rising risk of protectionism.”

Smaller steel producers could go out of business even as global demand is expected to grow by just 2 percent throughout 2015.



Market Impact

The two market indicators investors who want to trade steel should be looking at are the SPDR S&P Metals and Mining ETF (XME) and the capacity utilization rate.

The SPDR S&P Metals and Mining ETF (XME) has approximately 35% exposure to the steel trade and is a great alternative to trade in the steel industry especially for investors who are not too keen about trading with individual stocks.

The capacity utilization rate is an important indicator of the strength of the steel industry. It refers to the real production in comparison to the maximum possible amounts that can be produced in a plant. This is a helpful indicator in determining global steel trends in Europe and Asia.

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