In the history of All Steels, we have arguably just witnessed the longest sustained period of extremely weak demand and continuous falling prices. However, all cycles eventually bottom out, and, to borrow a political term, the green shoots of recovery are now becoming visible.

It appears that most market players have finally reduced their stock levels to the minimum operational requirement, just as steel mills are realising that they can no longer endure any further losses. Throughout the week, many steelmakers have hinted at intentions to raise prices, and as of Friday night, ArcelorMittal has announced a £30 per tonne price increase on sections in the UK, with immediate effect. The timing of this increase seems strategically logical as they press on towards the summer shutdown period when orders are less essential. Moreover, with many stockholders having to continually buy to replenish low stocks they are in no position to hold a standoff position. The price increase should therefore be successful, and we really can’t see any reason why other EU producers will not follow suit.

The ArcelorMittal announced increase is probably the shock the market needs as stockholders and dock stock sellers have found themselves in a rut of continually chasing prices down, but this bounce must change mindsets. The increase is sufficient not to be ignored and if on-sale participants follow the golden rule of not selling below replacement costs an immediate price hike by the trade should be evident from the start of next week especially if the other mills follow the ArcelorMittal lead. 

Steel Manufacturing Costs
ArcelorMittal reports that the impetus for change has been driven by input cost pressures. While many of the fundamental elements influencing steel manufacturing costs have been declining, what is noticeable is that the reduction in steel prices has exceeded this decline in base material costs. What is also significant in recent weeks, is that the anticipated drop in scrap prices has not materialised. However, the development that seems to have caught producers really off guard is another surge in electricity prices, especially in Spain, a key hub for Europe's production of popular sections. Besides the unexpected rise in Spanish energy prices, there are currently no other significant base cost factors driving steel price inflation. However, the short term expected decrease in scrap prices hasn’t materialised, and early indications from both Turkey and the EU are actually suggesting a price uptick. 

Trade Balance 
Historically, supply and demand have been the primary drivers of steel prices, and currently, demand is alarmingly low. Inflation and the resulting high borrowing costs have certainly stifled the economy, with the construction sector being one of the hardest hit. Anecdotal evidence also indicates that participants across the supply chain have been reducing their stock levels in response to lower demand, which has likely exaggerated the perception of weak demand. Currently, all economic indicators suggest a recovery is on the horizon. Just this week, interest rates were cut in both Europe and Canada, and in the UK, there are indications that a Bank of England base rate cut is imminent. One of the most encouraging signs for the steel industry is that the latest UK Construction Purchasing Managers’ Index (PMI), shows that construction activity increased at its fastest pace in two years during May 2024. Interestingly, the latest Steel Insight Report from MEPS forecasts promising prospects for the UK steel beam market, presenting several compelling arguments for an impending surge in demand.

We're all aware of how a shift towards positive sentiment can impact buying activity. We are also in an environment where the mills desperately need price increases, and the industry is coming from a very low stock base. Any, widespread panic buying to pre-empt anticipated price hikes, could therefore be self-fulfilling and lead to a significant surge in prices. 

Introduction of a UK Carbon Border Adjustment Mechanism (CBAM)
CBAM is scheduled to be introduced in the UK on the 1st of January 2027. However, there is some expectation that the UK will have to align with the EU’s earlier implementation date of 1st January 2026. The system aims to promote global decarbonisation by imposing a tax on imports, thereby equalizing the carbon costs borne by UK manufacturers. The mechanism for charging and implementation in the UK is currently under consultation, jointly conducted by His Majesty’s Revenue & Customs (HMRC) and His Majesty’s Treasury (HMT). Although we are still in the design and administrative phase of the charging mechanism, it is clear that CBAM will have significant implications for international trade. The varying tax rates from different countries and suppliers will substantially alter imported prices, leading to a notable upward shift. Given that we are potentially only 18 months away from implementation, inevitably, stockists in the UK and EU will soon recognize the importance of stockpiling to capitalize on the benefits created by the scheme. This will likely create an artificial environment of strong demand, and as we know, a buying rush can significantly influence mill steel prices. Consequently, it is highly possible that steel price inflation could be as aggressive as the deflation we have experienced over the past 12 months. 

Safeguard Quotas
The combination of weak demand and destocking in the long products sector has rendered Safeguards irrelevant, as large volumes of unused quotas have continually rolled over each quarter. However, starting from 1st July 2024, Safeguards will reset, and any unused quota tonnage will be reset to zero. All Steels believes that as buying activity picks up due to restocking and economic recovery, Safeguards will become a significant factor again, posing a considerable challenge for importers who will likely try to pass the risk onto stockists. It is crucial for everyone to be aware of this overlooked tax, as exhausting the quota will result in an additional 25% duty charge. In the EU, there is also a technical change affecting HRC quotas, where suppliers from developing countries (predominantly Asia) that are grouped in the ‘Other Country’ category will each be restricted to a 15% cap on total supply. It is believed that some countries already have shipments en-route for the quarter commencing the 1st July, making duties unavoidable unless any grace period is granted. The EU commission is also reportedly looking at giving some of these countries their own separate quota allocation. Due to this uncertainty, many traditional 'Other Country' suppliers have refrained from making further offers. Although All Steels does not trade in flat-rolled products, any developments in the HRC market affect the hollow section market, as HRC is the base material. This change in quota rules is likely to exert upward pressure on the prices of EU-manufactured hollow sections.

Conclusion
Given the depressed market we’ve endured for the past 12 months, it’s hard to imagine demand strengthening and prices rising. However, the facts suggest that we have reached a turning point for a potential rebound in steel prices. While many buyers are likely to remain cautious, this should help to prevent a price surge caused by panic buying but the indications of an uptrend in steel prices are undeniable and appear inevitable.