Semiconductor stoppages worry steel market

Semiconductor driven stoppages at automotive producers are starting to weigh on the minds of some European and Turkish steel service centres, which fear that tonnage diverted from carmakers to industrial customers could cause a reversal in the rampant uptrend.

Given the cyclical nature of the steel industry, rapid jumps are often followed by a quick downturn, or vice versa, and nobody wants to get caught cold with the costliest stock in the history of the industry.

A number of carmakers, including Fiat, Ford, Renault, BMW, Mercedez-Benz, Maserati, Jaguar Land Rover and Volkswagen, have either experienced disruption, or announced that they will halt or expect reduced production at plants in Europe and Turkey. In Italy, Fiat is closing its plant for 1-2 weeks. Germany's BMW will stop production at its Regensburg unit today and tomorrow, and is also pausing Mini production in the UK because of the shortage.

Previously, service centres had almost welcomed the outages, which gave them breathing space to catch up on delays caused by poor delivery performance from mills. Some initially believed the stoppages were driven more by sluggish car sales than any components problems. But now there is recognition that it is a real problem, which could dent automotive demand for steel.

Including indirect sales into the supply chain, automotive accounts for as much as 70pc of sales for some European mills, according to Argus estimates. Therefore, any prolonged stoppage poses a big risk to the market at large. In 2019, real demand from the automotive sector dipped only slightly in Europe, by around 3pc, but the decline in apparent demand was much greater, pushing prices down despite a mainly captive market for domestic mills. Argus' NW EU hot-rolled coil (HRC) index dropped from €508.50/t on 19 March 2020 to a low of €412.25/t on 15 November. The Italian index dipped from €479/t to a low of €384/t on 7 November.

The current sellers' market is far from those levels, with supply often more of an issue than price. Argus' NW EU HRC index is now above €1,000/t, up by €622.50/t from the depths of the Covid-19 crisis in June last year, while the daily Italian assessment is €975.75/t, up by €600.75/t in the same period. Supply remains tight, with most producers off market and some already booked into the fourth quarter. On downstream products, such as hot-dip galvanised, certain mills are already sold out for the year, while operating above 90pc of installed capacity. Imports remain risky given elevated lead times and prices, especially given uncertainty over the safeguard once it lapses at the end of June.

But the spectre of capacity previously ring-fenced for automotive opening up to the wider market is making some think twice before locking in at historical highs.

By Colin Richardson and Lora Stoyanova