Severstal has been forced to close its largest American plant as the price of steel plummets and fears grow that global recovery is going off the rails.
Steel plants have been swinging to losses as the cost of raw materials increases and declining demand caused consumers to build up stockpiles.
“Cash costs of hot-rolled coil are above the market so the mill is generating losses at current prices,” said Dmitry Smolin, a metals and mining analyst at Uralsib.
The Sparrows Point mill accounts for a quarter of Severstal’s production in the US, and the decision to close it down for 30 days has been seen as negative for the Russia-based steel producer.
“We believe that the decision to stop Sparrows is prudent, however it will likely weigh negatively on the company’s financial performance in the US, as the fixed operating costs will be spread across other facilities in the US,” Citibank analysts wrote in a note.
Investors are hoping that demand will return to the market once consumers have run down their inventories, and while the plant may be idle for longer than planned it will resume activity in the near term.
“Basically, we believe the steel mills are facing a buyers’ strike situation, and are focusing on maintaining production discipline and avoiding oversupply,” Renaissance Capital metals and mining analyst Boris Krasnojenov wrote in a note. “The good news, in our view, is that the existing steel inventories may be largely worked out by the end of June.”
The price situation means that Severstal’s US operations are likely to run a loss for 2010, while the 20 per cent fall in steel prices, and a similar decline in aluminium, are symbolic of the world’s stuttering recovery.
Severstal were following the lead of ArcelorMittal, which shut down 3 plants in Europe last week as concerns continue that the Eurozone’s economic woes are not over. Tightening in China has also led to a fall in metals prices but the losses across the sector will eventually force prices up.
“Steel prices under the cost of current raw materials must go up, so we’ll see a price rise fairly soon,” said Smolin.