Recent Steel Bounce Looks Tenuous In Medium Term

BMI View: We highlight the recent uptick in a Bloomberg global steel producers index as being in line with our positive short-term outlook towards global steel prices. The MEPS Carbon Steel World Price, which currently stands at US$726/tonne, has risen above our short-term target of US$720/tonne, contributing to a positive technical picture for equities of steel producers. However, we remain cautious towards the global steel sector through 2014 as we forecast prices to average US$695/tonne for the year on the back of continued overcapacity, below-peak steel utilization rates, and sluggish global demand.

We believe the current uptick in steel prices is likely to persist in the short term, further bolstering the fortunes of global steelmakers and leading to modest equity gains. After significant weakness from Q112 through Q313, steel prices remain in an uptrend, bolstered by US and eurozone steel-intensive manufacturing gains. Renewed optimism in global demand, including from end users in the US automotive and energy industries and increased economic confidence in Europe, is likely to maintain short-term positive momentum for steel firms. Furthermore, western capacity cuts will help rationalise supply and demand dynamics within the sector, contributing to positive investor sentiment.

Crucially though, we remain cautious towards steel producers in the medium term given our forecast for 2014 steel prices to average lower than current levels. Indeed, we believe the global steel market will remain plagued by production overcapacity, despite the aforementioned cutbacks, and sluggish demand, through the end of the year. China in particular will weigh on global steel prices, with the country's failure to consolidate its bloated steel industry remaining the primary factor weighing on prices over coming quarters. We expect Chinese steel to continue to seep onto the global market, offering a cheap alternative to domestic production elsewhere.

Bouncing Off The Base
Bloomberg Global Steel Producers Index, RSI & MACD

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This article is tagged to:
Sector: Commodities, Metals
Geography: Global, United States

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