ARCELORMittal South Africa will drop steel prices for a second consecutive month next month as the global downturn starts to bite and demand declines. Moreover, prospects for further price drops in the medium term seem likely as the gloom in global financial markets spreads to other sectors.

The steel producer announced it would cut the price of long and flat steel products on average by 10%, or R1000 a ton, from the start of next month.
The price of some product lines, such as galvanized products, would fall by a more modest R500 a ton.
This follows an average 5% price cut, which comes into effect on Monday, the first for the year after prices ratcheted up by as much as 72% since the start of the year. Mittal sets its prices on the weighted average movement of steel prices in a handful of like markets.
An industry commentator said indications were that the price decline in steel was fairly widespread internationally, with a slowdown in demand for consumer goods such as cars and appliances, while construction activity in some countries was also slowing.
Mittal spokesman Sven Lunsche ascribed the decline to a softening in international demand, saying downward pressures on prices were expected to persist in the medium term. “It would be naive to assume the current financial crisis would not filter through to the real economy,” he said.
Cadiz Africa Harvest analyst Kurt Benn said softer demand in the U.S., the European Union and China, speculators’ large-scale abandonment of commodities, and to a lesser extent a destocking effect, were all factors that weighed on the price of steel.
“If you take all of this into account the price environment for steel over the next six months does not look very promising,” Benn said.
Moreover, input costs were not following the downward trend, which meant that margins could tighten, which could put pressure on the share.
Mittal’s practice of benchmarking prices against international price movements would imply a somewhat anomalous effect, because the price decline would accompany sustained demand in SA, which has been insulated to an extent from the slowdown because of the government’s massive infrastructure expansion program.
But while domestic market dynamics are not factored into price determinations, Lunsche said Mittal was seeing a slowing of demand locally in consumer-related sectors. “Of course we have a backstop with the infrastructure expansion program,” he said.
The basket on which Mittal sets its price includes Germany, China, Russia, and the U.S., but it also takes into account the direction of market movements and exchange rate volatility.
Mittal shares Sunday traded unchanged at R164 while those of its smaller peer Highveld Steel & Vanadium declined 3% to R130.
(Source: Business Day)