While demand is on the rise, overcapacity issues keep pricing volatile
May 2014 - The latest report from PwC finds that metals deals declined in the first quarter of 2014, falling to its lowest levels since 2008. While demand is on the rise and analysts are optimistic, there remain factors that are expected to keep pricing unstable.
“The construction market is definitely hurting the most from the decline in demand,” says Daniel Webster, PwC’s U.S. metals client service advisor. “The construction market features both flat rolled and long products being softer than they had been. Non-residential construction is still suffering and only at about 50 percent of where it was in 2006/2007, and that consumes an overwhelming majority of the steel going to the overall construction industry.
“As a result, the hot dip galvanize/galvalume lines at a steel mill that are very dependent on the construction market to recover are not running to capacity.”
At 9.3 percent of the first quarter’s deal value, activity in the steel segment underperformed all other segments, including aluminum and iron ore. This is a stark contrast to 2013 segment deals, which accounted for nearly 45 percent of the year’s value. Analysts believe this is due to continued pricing and overcapacity issues.
“Most other metals are suffering these same problems,” Webster adds. “The 2014 aluminum industry is rumored to be slightly under supplied.”
Low commodity prices are believed to be why metals deals in North America accounted for $327 million—coming in third after Asia and Asia-Pacific’s four deals totaling $2.2 billion and Europe’s five deals valued at $842 million, according to PwC.
Suppliers and OEMs are still reluctant to have a large amount of inventory on hand as pricing remains turbulent. “Continued price volatility [in North America] is the result of [activity overseas].”
As prices begin to creep up in the North American market, imports begin to come in from other regions which are oversupplied, Webster says. “And it tends to drive the price down lower very sharply and gets buyers nervous about carrying too much inventory due to price swings.”
Overcapacity in the steel industry remains prevalent. “Not a week goes by where some article somewhere is not tracking ... global overcapacity.” MM