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Steel industry to see less volatility in 2006

Wednesday, 01 February 2006 16:33:00 (GMT+3)   |  
       

Steel industry to see less volatility in 2006

Following a prosperous 2004, 2005 was slower for the global steel market when the prices of commercial grade products decreased in general while the prices of higher grade products continued increasing. Mittal Steel's latest attempt to bid for Arcelor is also reflecting this idea. Mittal Steel, mainly holds plants and production capacity for commercial production while Arcelor produces higher quality steel. Furthermore, specialty steel producers Corus and Nippon Steel are also rumored to be among Mittal's acquisition targets. Meanwhile, recently Japanese Nippon Steel announced a strong growth in profits despite unchanged production thanks to strong prices of high end steel products, and the company also stated they would focus on maintaining and developing their prices in 2006. On the other hand, Indian Essar Steel recently announced a weak growth in profits in the quarter ended on December 31, 2005 despite an obvious growth in production. The company blamed rising costs of inputs like iron ore, gas, iron ore fines and other raw material, coupled with falling prices of finished steel in domestic and international markets for the weak profit. The completion of the total integration program, including the commissioning of the Cold Rolling Complex at Hazira, the beneficiation plant at Bailadilla and the slurry pipeline from Bailadilla to Visakhapatnam are expected to safeguard the Company's profitability and growth in the long term. These are just a few of the examples where the steel industry is heading in 2006. The turmoil of 2005 will ease in 2006, however, there is no ground for sharp price increases. Looking at specific product categories, 2006 is not expected to be a strong year for rebars because of the slow down in construction industries of many countries. Strong construction activities in China in order to renew the infrastructure and get prepared for the Beijing Olympic Games in 2008 have relatively slowed down. Currently, Pakistan, Iran and India appear to be the countries where the construction industry is going upwards. Yet the activities are limited considering the capacity increases. China will definitely be a net exporter of rebars in 2006 while India will also produce more than it consumes. Automotive industry, the locomotive of flat steel consumption is in a decline in the US and Japan, the largest two markets. The new vehicle sales declined for a seventh straight month in Japan, and in January Ford Motor Company announced 30,000 layoffs of production workers, one-third of which is remaining North American production workforce. Although there are some news stating that Toyota holds good sales figures in the US, the lower than expected growth in the US economy may also affect car sales in the country in 2006. Nevertheless, automotive industry is rapidly developing in South Korea and China. Meanwhile, global household appliances production is currently strong. Shipbuilding and machinery industries are also strong in South Korea and Japan. The demand for tubular products is expected to remain strong in 2006. Russia is planning further natural gas pipelines due to frequent conflicts with Ukraine. Meanwhile, the rapid increase in oil prices will also keep the demand for OCTG pipes strong for oil projects. 2006 will probably be the year of mergers. Even if Mittal does not manage to takeover Arcelor, it will try to acquire other specialty steel producers around the world. Meanwhile, Russian steel companies such as Severstal and NLMK will also look for further mergers around the world. China is trying to build two companies with capacities over 30 million tons per annum by 2010. Japanese steelmakers may consider consolidating within the country in order to gain strength against foreign companies. South Korean and Indian steelmakers will also search for mergers within the industry. Meanwhile, iron ore prices of the three dominant iron miners will probably remain strong in 2006. Most of the expectations are currently for a 10 to 15 percent increase, which would still be very low compared to the 71.5 percent increase in 2005. scrap prices saw a rebound to $220-230/mt due to winter conditions following the surprising decreases in mid-2005 to $140/mt levels. In 2006, scrap prices are not expected to fall below $170-180/mt.

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