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Steel industry seeks answers on recovery prospects

The tortuous question of when ailing steel demand might recover from the global economic downturn is likely to dominate talks at an industry gathering in New York next week.

High profile speakers for the bi-annual industry gathering including Lakshmi Mittal, chairman and the chief executive of the world's top steelmaker ArcelorMittal, will also seek answers on whether US stimulus will revive consumption.

Steel mills in the United States, one of the world's top producers of the alloy, are working at 45%-50% capacity usage as demand from key consumers like auto and appliance makers has tumbled due to the global recession.

Falls in the prices of most widely traded steel products, like hot-rolled coil (HRC) and billet, have slowed. Some prices have bounced slightly from their lows in some regions, after a near 70% price fall between mid-2008 and January 2009.

Several analysts believe destocking has come to an end and that order entries are beginning to improve, but they warn that recovery will take time as end-user demand remains depressed.

“We believe that destocking has largely run its course, and that service centers are beginning to increase their order activity,” analysts at Dahlman Rose & Co. said in a research note, adding they expect capacity utilization to rise to 60% in the second half of 2009.

Steel production in North America has dropped by more than 50% in the first four months of the year, according to figures from the World Steel Association.

Earlier this week, US steelmaker Nucor said it expected a narrower second-quarter loss thanks to improved order entries in the recent weeks.

“ArcelorMittal's flat-rolled price increase and Nucor's comments of improved order entry ... are further evidence that the sudden tightness we've noticed in recent weeks is spreading,” said independent steel analyst Michelle Applebaum in Chicago.

“We believe the 9-month period of inventory destocking has come to an end.”

But in terms of the end-user market, analysts still see a recovery as months away and the road quite bumpy.

“Final markets for steel products, like automotive and construction, are severely undermined,” Sebastian Castelli at Societe Generale said in a research note.

The world auto industry is suffering massively from the global recession, which forced one of the world's best known automakers General Motors Corp to file for bankruptcy on June 1.

“Global steel markets are more likely to remain weak and prices volatile at depressed levels as the economy recovers or incentive plans start improving steel demand,” Castelli said.

Emerging markets will see a quicker recovery, analysts say, particularly China, where production rose 7% in May to near record highs seen in June last year, prompting several analysts to raise their production and price forecasts.

But supply discipline remains key for a price rally.

“The overhang of spare capacity in the market means prices can only sustainably rise if steelmakers collectively maintain discipline in bringing back supply,” Macquarie Bank said in a research note. (Reuters)