Polish steeled for recovery

By bne IntelliNews April 29, 2010

Jaroslaw Adamowski in Warsaw -

After last year's 29% drop in demand for steel, the Polish Association of Steel Stockholders projects a solid 23% growth in production in 2010, up to 9m tonnes per annum, and expects that Poland's steel use will grow by 23% and exceed over 10m tonnes this year.

Given that the country's demand for steel will surpass domestic production, this trend could be good news for neighbouring Ukraine and the Czech Republic as well, since both countries' steel industries are steadily recovering from the crisis. On the other hand, while the brisk growth of prices on the steel market, as witnessed since the beginning of the year, gives cause for optimism to steel producers, many companies fear it could curb the shaky demand for steel.

"Prices of certain steel products have risen as much as 40% since the beginning of the year, and, given that Poland's demand for steel remains rather moderate, it is a reason for serious concern," says Piotr Janeczek, CEO of Stalprodukt, a Polish steel manufacturer. "Steel producers claim this rise in prices is dictated by the mounting crude prices, but it is doubtful if such increase in prices is healthy."

After last year's 26% drop in demand for its products, the Polish steel industry has used the opportunity to cut costs and restructure. A typical measure of cutting costs and distributors was to halt all investment projects, a practice which could have grave consequences for the industry's competitiveness. However, anti-crisis strategies varied among the companies, and not all have been pressured into cutting all investment. "Against the general trend, we decided to boost investment. Developing our export sales has remained on the top of our priority list in spite of the crisis", says Jerzy Durbacz, sales director at Nova Trading, a Polish steel distribution company. "Last year, we launched several important investments and purchased new technologies for our plant, including a recently set up laser cutter. We are also continuing to develop our Service Center."

According to its sales director, establishing itself in a niche proved to be an ample strategy for Nova Trading, specialised in stainless steel, which is more durable and costly than the predominant carbon steel. "With no doubt, last year has been tough for the Polish steel industry. However, compared with the carbon steel sector, the stainless steel market has remained in quite good shape," says Durbacz. "Carbon steel is consumed by branches that are particularly sensitive to the conjuncture, for instance, the construction market. In what concerns stainless steel, the crisis has equally forced a drop in sales, but our clients represent various industries with different levels of resistance to the downturn. This is why our company managed to retain its 2008 sales figure last year, and to end 2009 with a net profit, which I perceive as a success."

Constructing a recovery

With the winter over, the resumption of delayed projects in housing and commercial construction markets is expected to increase the demand for steel products in Poland. The building momentum for infrastructure could be another boost for the steel industry, as investment in this sector is expected to grow a further 10-15% this year, owed mostly to the EU funds. "This year certainly won't be short of challenges for us", says Stalprodukt's Piotr Janeczek. "The most important one will be to maintain the competitiveness of our products and to benefit from the conjuncture on the infrastructure construction market."

As a general rule, steel distributors were hit harder by the crisis than producers, and this has already forced a consolidation in the highly fragmented distribution sector. However, what could weigh on the still fragile steel market is the new pricing system deal, recently struck by the world's biggest iron ore producers and ironworks from China and Japan. The accord reshapes the established price system, replacing yearly contracts with quarterly deals. Some experts believe that it opens door for excessive iron ore speculation, and that it could easily cause prices to skyrocket back to their 2008 record high.

European steel producers have denounced the new practice as unproductive and complained about it to the European Commission. In the meanwhile, both steel producers and distributors remain wary of high costs of a potential iron ore price roller coaster. "Steel prices have been climbing sharply since the beginning of the year", Robert Wojdyna, the president of the Polish Association of Steel Stockholders, told the Rzeczpospolita daily. "The market was expecting a rebound, but certainly not in such a rapid manner, which is utterly inadequate to the yet unstable demand for steel."

"Steel mills' recent announcements of a further rise in prices unquestionably push their clients to increase their stocks," argues Nova Trading's Jerzy Durbacz. "The question is: for how long?"

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