Stainless Steel Scrap Expects to Drop

Stainless steel scrap dealers in Europe have braced for steep price falls later this year because they expect nickel to drop as a result of impending output cuts at stainless producers.

"We're all very nervous at the moment because of major cuts coming at producers in the third quarter and beyond," a major European scrap trader told Reuters.

"Nickel has risen recently but producers have told us they're cutting thousands of metric tons of production starting in the third quarter.

"Add to this a probable end this summer to the strike at Inco, and it gets to a point when we'll probably have nickel below $8,500 a metric ton," the trader added.

Scrap prices in the EU member countries are settled using the previous monthly average nickel price on the London Metal Exchange for the next month's deliveries.

Stainless steel production accounts for around 75 percent of nickel consumption.

Three-months nickel was quoted at around $9,230 a metric ton on the LME at 1140 GMT -- about $1,000 higher than at the start of May.

Volatility in nickel prices was expected to remain while the strike continued at Inco Ltd, which accounts for almost 10 percent of world output.

"We expect scrap prices to ease a lot in July and probably bigger falls in August -- the market could collapse by 25 percent," the trader said.

"To settle (scrap) contracts now based on nickel is a bit dangerous considering the (stainless steel) cuts that are coming and the likely resolution to the strike at Inco," he said.

European stainless steel giant Arcelor told Reuters on Wednesday it would cut output at some plants in Europe this summer because of lower demand and high industry inventories.

The Luxembourg-based firm, one of the world's largest stainless steel makers, plants to cut production by up to a total of 50,000 metric tons a month at its Ugine & ALZ subsidiary's plants in Genk, Belgium, and two in France at L'Ardoise and Isbergues, the official said.

Other European steel producers such as Finnish-Swedish steel maker Avesta-Polarit and Germany's ThyssenKrupp Stainless are set to cut output in the third quarter, scrap traders said.

TKS was this week expected to announce cuts of around 40,000 metric tons for the third quarter at its Italian subsidiary ThyssenKrupp Acciai Speciali Tern, traders and analysts said.

AST has a yearly rated capacity to produce 1.3 million metric tons of stainless steel, but produced just 950,000 in 2002.

TKS, in a statement to Reuters, dismissed analysts' forecasts of cuts of more than 100,000 metric tons in summer.

"The summer months are always slightly weaker. The analysts' forecasts of production cutbacks on that scale at ThyssenKrupp Stainless in the third quarter are completely unfounded," it said.

AvestaPolarit declined to comment.

Still, scrap traders said other western stainless steel producers have also considered production cuts this year.

In the United States, North American Stainless had sharply cut its scrap intake this month and is taking no feed from traditional suppliers in Europe, scrap traders said.

However, traders said U.S. stainless steel producers had recently taken advantage of dollar weakness, exporting thousands of metric tons of stainless to Asia, traders said.

For the moment in Europe scrap traders are offering sellers outside the area about $880-900 a metric ton for 18/8 solids and about $100 less for same grade turnings.

Markus Moll from Steel Metals Markets Research said the European stainless market was being squeezed by the exchange rate and poor domestic demand.

"It's partly to do with the strengthening euro, which is hurting European exports, and partly to do with weak demand in European consumer industries," he said.

Producers in Europe export much of their annual five million metric tons of output, with Asia typically taking one million.

Moll said he expected European exports to Asia to drop to about 500,000 metric tons by year-end as buyers turn to cheaper U.S. products as the euro has hardened to around $1.17 versus the dollar from around parity at the end of last year.

He said European exports were set to suffer further as China reduced its imports due to rising domestic production. China's stainless consumption is well on course to increase by 300,000 metric tons to 1.3 million this year with imports favoured from cheaper Asian suppliers.

"Producers in Europe have already started reducing their scrap intake. Three months ago there was no free-floating scrap on the market -- now there is," he said.