Steel Outlook Cautious

The global outlook for steel trade is expected to remain challenging for the remainder of this year because of slowing demand in China and a decline in construction projects in developed countries, according to a Kuala Lumpur research firm.
A new report by RHB Research Institute found that the rising price of raw materials – particularly iron ore – has prevented producers from benefitting from an uptick in steel prices earlier this year.
Globally, steel manufacturers did well during the first quarter of this year because they could draw on inventories of cheap raw materials, the report stated. Steelmakers generally carry inventories of about two months of raw materials. This backlog causes a delay of about one quarter in how the prices of raw materials impact steel companies’ earnings.
For this reason, RHB expects most steel companies to report lower earnings for the remainder of this year. The weakness will also be impacted by seasonal downturns in the third quarter during the rainy season in many parts of China and the slowdown in the Chinese real estate market.
RHB is more positive about this year’s final quarter, when it expects steel traders to begin to restock inventory ahead of the winter season, which it expects will end the current inventory destocking cycle caused by tightening credit.
The research firm believes the only relief possible for the steel sector this year would be an easing in the tight supply of iron ore, which it does believe will being next year as several mine expansions are completed. Vale, Rio Tinto and BHP Bilton have been aggressively expanding their mines since 2009, but some projects have experienced delays.