The National Association of Steel Service Centres (NASS) has conducted a number of surveys with its Members within the UK and its supply base over the last few weeks. Given the significant upward price pressures evident in the steel supply chain, NASS has taken this opportunity to comment and reflect upon current market conditions in the UK as the year 2016 comes to a close and we look forward into 2017.
2016 has certainly been a year of two halves with modest steel supplier increases implemented in the first half of the year, a welcome relief for the steel producers seeking to achieve acceptable margins having suffered a continuous downward spiral of steel prices during the previous 24 months.
Post the Brexit vote, the first major factor to impact on steel prices has been currency related. The weakening of Sterling against primarily the Dollar and Euro has effectively increased steel prices by circa £65-£70 per tonne. In the second half of 2016 the escalation of raw material prices, particularly on coking coal, iron ore and scrap, has resulted in steel producers seeking to retain acceptable margins by announcing significant price increases to maintain pace with rising input costs of £150 plus per tonne. This situation is not expected to change in the short term, with further significant increases planned for Q1 2017 and with prices for Q2 onwards currently ON HOLD.
In addition to input costs, steel producers are also being affected by increasing conversion costs due to energy charges and shipping/transport rates influenced by the increase of oil prices of circa 60% since the beginning of 2016. Whilst the steel price increases in 2016 are seen as significant, it should be noted that, in effect, UK steel prices have only returned to levels seen in 2014. There is an expectancy that steel prices will continue to rise throughout 2017 to reflect import/conversion costs and will be further influenced by supply and demand in the UK market.
In 2016, demand for NASS Core Products - namely Hot Rolled, Cold Rolled, Galvanised, Electro Zinc, Heavy Sections, Merchant Bar, SHS and Plate is expected to outturn slightly higher than the average of 6mt per annum which has been the norm for the last seven years, i.e. post the depression of 2008/09. Demand for 2017 is expected to follow a similar trend.
Supply to the UK steel market, however, will have to encapsulate reduced UK production and potential restricted import availability as overseas mills and traders have to consider the attractiveness of the UK market when compared to domestic opportunities. The presence of European Import Protection Duties have already created a dramatic impact on some steel products, which is likely to be further exacerbated if the Hot Dipped Galvanised product has duties imposed in December. The consequences of this latter situation has repercussions, not
only for Hot Dipped Galvanised, but perhaps more significantly on feedstock, with availability of Hot Rolled Coil and Cold Reduced Coil the likely losers as mills seek to maximise revenues from long leg production.
The other major factor in the supply/demand equation is that of stock/inventory changes. UK steel service centre inventories have, in the last two years, reflected need to buy, with stock days being consistently maintained to ensure cash-flow parameters can be achieved. This has been particularly evident during the downward spiral of steel prices of 2014/15 and through to Q1 2016. The concept of purchasing on a speculative basis is no longer considered the norm, or realistic, as the components of the steel supply chain seek to protect balance sheets and avoid the misery of windfall losses experienced since 2009. The current NASS inventory data indicates that stocks are at best in balance although some products have seen a reduction throughout 2016. If the dynamics of steel supply resulting from restricted supply to the UK market comes to fruition, then some gaps in stock portfolios is inevitable.
In conclusion:
Demand within the UK in 2017 is likely to be on similar levels to those experienced in 2016.
Supply to the UK market in 2017, however, will probably be subject to EU trade restrictions from overseas sources and, together with reduced UK output of some steel products, will put pressure on steel supply chains in terms of consistency of supply and potential outages/gaps in steel service centre inventories.
Steel consumers should take note of the dynamics of the UK market, as steel prices in 2017 will have to reflect the relative input/conversion costs to steel producers, exacerbated in the UK by the recent exchange rate movements.
Availability and consistency of supply of some steel products could well depend on the attractiveness of the UK market being a key and deciding factor of both European and Rest of World suppliers willing to supply the UK market in the year ahead.
UK steel service centres have an important role to play in effectively communicating the above throughout the steel supply chain.
Certainly interesting times ahead!
Peter Corfield
Director General, NASS