With prices of many commodities at multi-year lows, recent financial releases from some of Europe’s major steelmakers delivered a reminder that not everything is bad in the steel industry.
Why, when most stories surrounding the steel and commodity markets are overwhelmingly negative these days, might this be the case?
Firstly, while the demand side of the industry offers little cheer for Europe’s steel industry, steelmakers themselves have been rectifying issues on the supply side. Blast furnaces have been mothballed, finishing lines likewise and the result is a leaner and less oversupplied industry.
In turn, this has provided European steelmakers with greater pricing power. Steelmakers have thus been able to benefit from the fall in raw material costs, i.e. iron ore, coking coal prices, over the past year or so. While steel prices may have fallen, raw material costs have fallen even faster, with Europe’s steelmakers pocketing the difference.
Secondly, Europe’s steelmakers have undoubtedly benefitted from the weakening of the euro over the past 12-18 months. A weakened euro has made imports into Europe relatively expensive, and at times seen European steel prices amongst the lowest in the world. Buyers have been incentivized to purchase from European suppliers.
Indeed, perhaps the relative underperformance of Tata Steel’s Europe division in the chart above can be put down to the fact that a large part of this division, i.e. its UK operations, is based outside the eurozone.
But can the improvement last? Will profit margins continue to increase?
Certainly, margins have not received any boost from increased steel prices this year. In fact, European steel prices have only continued to fall through 2015.
Nevertheless, many of the factors that acted in favour of European producers last year continue to hold true today. Previously-idled works have not been hastily restarted, and the euro continues to remain weak against major currencies.
Since the start of the year in fact, the euro has weakened by a further 9% against the US dollar. Meanwhile, despite the recent worries concerning China and its steady devaluation of the yuan, the euro has still weakened against it by some 5% so far during 2015. Even against the rouble, a currency heavily tied to the oil price, the euro has held steady.
Other factors increasingly suggest that there is cause for concern, however. While European prices were at times amongst the lowest in the world back in 2013/14, that is no longer the case today.
While European producers have clearly benefitted from falling raw material costs, producers elsewhere have increasingly chosen to pass them on in full and then some. In particular, we should look at Chinese producers, which have slashed their prices in a bid to retain and expand sales. As a result, European steel prices are not necessarily the cheapest available these days and a gap has opened up between Chinese prices and those elsewhere.
The recent devaluations of the yuan will only serve to make this policy more financially viable for Chinese producers. And so there are questions over how much more European producers can benefit from raw material weakness, which will probably continue in the short term.
But rather than letting margins collapse again, producers will probably have some success in retaining them at these higher levels. Continued euro weakness will help, as may the increased trade action that has occurred over recent months (the EU’s anti-dumping investigation into imports of cold-rolled coil from China and Russia could have a large impact in particular, at least in the short term).
And so, while European producers may be frustrated that their profit margins do not continue their upward trajectory, Europe’s steel industry is certainly in a much healthier position than it was just 2-3 years ago.
This article was also published for Steel First in August 2015