***COMMENT: Making Waves

It’s very easy to get carried away.

As some steel prices in some regions continue to rise, talk of has begun to circulate that mills will start to ramp up production as producers look to take advantage of higher-value transactions.

And scrap initiatives in Europe seem, at first sight, to have buoyed demand and new sales of light vehicles — Germany alone is likely to see 22% growth in sales as a result of the country’s initiative, according to JD Power projections.

South Korean galv exporters have also managed to gain some increases on Gulf-bound shipments, having taken advantage of currency devaluation to gain a stake in the market.

But the lessons of last year should not be forgotten — things can change extremely quickly.

The European market for new cars went from boom to bust in a matter of months, and it is likely that new sales will once again post declines once scrappage initiatives come to a close.

European automakers, like steelmakers, will find it difficult to deal with another fall in orders. The potential for government intervention means that plant closures in Europe will be extremely difficult, and a great deal is being banked on growth in emerging markets.

Steelmakers in Europe are similarly lumbered.

As Jürgen Nusser of Eurometal revealed last week, European stocks have progressively fallen since October in absolute terms, but have continued to rise when measured in days of sale.

This is worrying.

So far steel production cuts seem to have had the desired affect — stemming price declines and stimulating increases in some areas. The mills have tailored output well to apparent demand.

But talk of restarting idled lines could be premature, it still seems unlikely that real demand is growing.

As the summer season begins (certainly in London, where the weather has become more clement), it would be extremely concerning if there was not some recovery in prices — we are entering the traditional construction season after all.

While these price rallies are encouraging, and bode well for the prospects of a longer-term recovery, many market participants are convinced they are temporary. And the evidence is mounting.

Short-termism is dangerous and the industry would do well to look beyond the summer, and indeed 2009.

A greater consideration for steelmakers, processors and end users alike is how a sustainable recovery will manifest itself, and how those companies will take advantage of this resurgence.

The time for battening down the hatches is past — the steel industry should now set a course for calmer waters.

View more comment on the prospects for the steel industry: Green Shoots or Foool’s Gold?