By Humeyra Pamuk
LONDON, Jan 21 (Reuters) - The worst could be over for depressed steel prices with slow improvement on the cards in Europe as evidence grows that destocking in the $800 billion industry is close to an end.
But analysts dare not talk about a sustainable recovery in underlying steel demand as such and a come-back is not expected before the end of the year, if not 2010.
"We're not looking at further steep falls (in the price) nor on the other hand are we looking at a rapid recovery," John Lichtenstein, global head of steel at consultants Accenture.
Steel demand and prices have tumbled across the globe after the global credit crisis paralysed consumers' purchasing power and also forced producers to cut production sharply to match weakening demand.
It was that swift supply response by steelmakers, which has removed millions of tonnes of capacity from the market. Coupled with stockholders having almost depleted their inventories in the last six months, prices are likely to find a floor.
"There has been a considerable destocking of the entire supply chain and it is coming to an end," Lichtenstein said.
"Any picking up in end-user activity will flow through to the mills and increase orders and as intermediaries gain some confidence that the uptake is underway they'll begin a modest restocking," he said.
In October, German steel traders Coutinho & Ferrostaal estimated that there were around 3 million tonnes of steel products in the stock piles in warehouses and at ports in the Middle East and Black Sea region.
In December, market participants at a steel conference in Dubai said that inventory levels in the Middle East have since then come down below one million tonnes.
"Talking to suppliers and mills in the region (Middle East), I believe inventory levels have fallen to as low as 500,000 tonnes recently," said an Istanbul-based steel trader, adding he did not expect to see a further slump in the price.
Prices of steel billets, a semi-finished form of long steel mainly used in construction, have risen above $400 per tonne in the Black Sea market recently after hitting lows of $350 a tonne in late October.
The price of hot-rolled coil (HRC) in Europe currently sits above 450 euros after hitting 400 euros per tonne late last quarter.
The construction boom in the Middle East, coupled with insatiable demand from China pushed billet prices to record highs above $1,200 per tonne in June 2008.
Severe production cutbacks by major steel giants such as ArcelorMittal, Russian Severstal and Korean POSCO have supported prices, several analysts said.
"According to my estimates they have taken out 90 million tonnes of production in the last four months of the year," said Peter Fish, managing director of UK-based consultancy MEPS International.
For a factbox on supply cutbacks from steelmakers click on
DIM DEMAND OUTLOOK
But prospects for recovery in underlying demand in 2009 remain bleak, with major steel consuming industries such as automotive and consumer durables still in a grim situation.
"The market is not OK," said Rod Beddows, Chief Executive of consultancy Hatch Corporate Finance. "There is a restocking of inventories to a certain extent but fundamentally to get back to the levels of 2007 is going to depend on economic factors."
"And we don't see those macroeconomic factors yet delivering on that. The credit crunch is not over," he said.
Analysts at Macquarie Bank have lowered their projections for steel demand in 2009 to a fall of 7.5 percent year-on-year, from an estimated rise of 2.3 percent last year.
"75 percent of steel consumption is driven by fixed capital formation, infrastructure building. If we are entering a period where saving is encouraged and consumer spending is discouraged that...will be entirely beneficial for steel," Beddows said. Hence, he joins the ranks of several analysts who bet that government-led economic stimulus packages focused on infrastructure spending will help boost steel demand, but possibly not so soon.
"The issue is the timing," said Tim Williams, director of the global metals and mining team at Ernst & Young. "In China, they switch these things (packages) on relatively quickly but in the West you could never know how long it will take them..."
(Editing by Peter Blackburn)