North European stockholders wary of further margin squeeze

If European steelmakers achieve targeted flat product price rises, a number of stockholders could be facing disaster unless they can pass the higher costs on, sources said Friday.

Overcapacity in the steel production sector is mirrored downstream, with fierce competition chasing every ton weighing on stockists’ outsell prices. One German distribution source said margins had been trimmed by €10/metric ton as a result of lower sales prices to end users, and a slight increase in purchasing prices from mills.

“Our margins reduced by €10/mt by not being able to pass on the increases. If the customer says it does not believe the mill price is up, they can always go elsewhere,” he said.

European mills have hardened their attitude to sales, with further increases announced in recent days, and one major player withdrawing previous offers in a bid to impose higher levels. The problem for German stockholders is the lack of material they have, indicating at least some will have to buy soon.

According to stockholder association Bundesverband Deutscher Stahlhandel (BDS), flat steel stocks in Germany totalled 1.24 million mt at the end of December. That total is likely to have declined through January. In the first two months of 2015, total sales of flat products was 1.07 million mt, suggesting current stock levels are only just over two months, a much lower total than normal. Mills are confident this will result in new sales at higher prices.

A senior industry figure said stockholders require higher working capital when prices rise as the price multiplying factor applied to stock volumes and to tons sold increases. The increased value of assets requires higher financing on the liabilities side of the balance sheet, meaning increased support from either shareholders or banks.

“Considering these arguments and eventually some others, it is only one step to admit that consolidation in European steel distribution might in the coming months and years move significantly higher on the agenda of steel distribution stakeholders,” he said.

The stockholder agreed noting, “sooner or later some companies have to disappear from the market. We have good financing and we’re pretty strong but we’re also depending on making margins. It’s not just about cash flows. It cannot continue.”

Whereas multi-product stockholders and service centres are struggling, those with automotive contracts have enjoyed a good start to the year. “Demand has been the same as January, it was such a good month for us. Don’t ask us why, we’re on a lonely island with great volumes whereas everyone else is struggling,” a source in Germany said.

He also pointed to lower inventories in January as a sign mills will be able to increase sales prices. It seems the ability of downstream players to pass the extra costs onto their customers will be crucial to survival.

Peter Brennan, PLATTS