European steel: Spot the cartel

Date: 28/06/03

Despite a tough market, some steel prices have been steadily rising

THE global steel industry is in a mess. Overcapacity and weak demand have hurt steel producers. Last year, 847m tonnes of steel were produced, but consumption was only 765m tonnes. Steelmakers have responded by consolidating. Last year in Europe, for example, Arcelor, the world's biggest producer, was formed from a three-way merger of Spain's Aceralia, France's Usinor and Arbed, a Luxembourg-based company.

As a result of the merger, Arcelor has restrained production. In Europe, that has helped other big producers, such as Corus, a troubled Anglo-Dutch group, and ThyssenKrupp, Germany's biggest steelmaker. Buyers of steel, however, have been less happy. None will talk openly, fearing retaliation from their suppliers, but The Economist has spoken to several big European firms that are struggling to cope with steady price increases.

The chief executive of one large Italian manufacturer was especially outspoken. His firm uses more than 200,000 tonnes of flat plate steel each year, so higher input prices have nasty knock-on effects on margins. He reckons that over the past year prices for ordinary steel have risen by 15-20%, and have softened a little recently only because demand has weakened. In effect, he says, Europe's big three producers operate a cartel that controls the market, at least during periods when demand is not actually falling.

Surely that should be of interest to the antitrust authorities in Brussels? Yet unofficial complaints by buyers have gone nowhere. And few companies are willing to make their complaints official, once again for fear of retaliation.

In April the big steelmakers upped the ante once again when they said that they were increasing prices by 3-5% for some basic steel products in the second quarter. Even if analysts are right to think that, with buyers squealing, the increases are reaching their limit, hot rolled coil steel, for example, is now selling at around €330 per tonne, compared with nearer €200 per tonne at the start of 2002.

Things are a lot worse at the specialist end of the business. Consider tinplate steel. Although it represents only 3% of global steel production, it is a high-end product, used in particular for food and drink cans. The top ten steel firms control 53% of this market, twice the share of the top ten in total steel production. In Europe, Arcelor, Corus and Rasselstein, a German specialist steelmaker, dominate supply.

In 2001, the three firms announced coordinated price increases of 5.5%. In 2002, they said they would raise prices by up to 3.25% - and Arcelor also announced a one-off 10% price rise in some countries, to make its European pricing “more coherent” after the merger. Earlier this year, another 5% price increase was announced.

The effect of these rises was mostly to alienate customers, who complain that, as there is no obvious link between the higher prices and the costs of the steelmakers, the increases are opportunistic. A few big customers have resisted, so that the price increases actually achieved were less than those announced - more like 3%, 1.25% and 3.5% in 2001, 2002 and this year respectively. Still, even for them, prices rose by significantly more than inflation.

Even if Europe's antitrust authorities do not intervene, it is not clear that raising prices in this way is in the steelmakers' long-term best interests. In food and drink packaging, for instance, excessively high steel prices might lead manufacturers to switch from steel cans to alternative products such as aluminium pouches.

Some customers say that the steelmakers are belatedly starting to recognise the danger, and are showing signs of a greater concern for their customers. “The problem is that the big steel companies have historically had very little knowledge about their customers,” says the chief executive of a large European manufacturer. “This is new for them.” The manufacturers are hoping the steelmakers learn fast.

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