The steel paradox will soon hit the entire German economy

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When companies send ad hoc releases, they usually have bad news to announce.

Especially in times of crisis like now.

The content of the information that is mandatory for listed companies is often incorrect forecasts, bankruptcy applications or restructuring, usually associated with considerable job cuts.

Recently, Germany's largest steel trader Klöckner & Co.

issue such a market release.

The content, however, was anything but bad.

This is already shown by the headline: "Exceptionally strong operating result expected in the first quarter of 2021."

The profit before interest, taxes, depreciation and amortization of Klöckner & Co.

in the first three months of the new financial year.

That is a multiple of the previous forecast of 21 million euros before special items.

The share of the S-Dax group is therefore at its highest level for almost two and a half years.

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Klöckner has benefited from high demand for steel for weeks.

The sales figures have risen so strongly that the reserves held are dwindling.

A spokesman for the group says that supplies are only arriving slowly due to temporarily reduced capacities at the steel mills.

Source: WORLD infographic

Steel is therefore becoming increasingly scarce on the market, just like the raw material chips recently.

And expensive.

This was shown by the MBI steel monitor in the first week of February: According to this, a ton of hot wide strip costs around 720 euros, almost twice as much as it was six months ago.

“We are currently clearly operating in a seller's market,” says the Klöckner spokesman.

That last happened in the financial crisis of 2008/2009.

What the Klöckner balance sheet benefits, makes thousands of steel processors in this country sweat on their foreheads - especially small and medium-sized suppliers who produce sheet metal and forged parts, for example, as well as screws and springs.

They are processed further in the automotive industry, in mechanical engineering or in the manufacture of electrical appliances.

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Several industry associations are already sending emergency calls.

"The situation is extremely tense," says Christian Vietmeyer, managing director of the German Steel and Metal Processing Association (WSM), the industry representative for around 5,000 processing companies across Germany that buy and process around 20 million tons of steel every year.

There are major supply difficulties with steel procurement.

Individual companies are already reporting waiting times of over 20 weeks for material that would otherwise be delivered within eight to ten weeks.

"Suppliers wait months for steel deliveries"

According to Vietmeyer, the first companies have to cut production due to material shortages.

And not a few will soon stand still, warns the association representative.

"Processors in all segments are now very worried about their ability to deliver." In the next step, this affects the entire German economy.

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"Because in the end no cars, engines or washing machines can be built without the appropriate vendor parts," explains Vietmeyer, who is also concerned about whether the significantly higher purchase prices for steel can be passed on to customers.

Bernhard Jacobs' description of the location is just as dramatic.

"Suppliers wait months for steel deliveries and have to pay top prices on top of that," complains the managing director of the Sheet Metal Forming Association (IBU).

At the same time, the companies are almost without a chance in the search for cover purchases or even additional quantities compared to large-scale industry.

“As a result, many companies are no longer able to serve their customers on time,” says Jacobs, indicating that the first legal disputes are already underway.

In the opinion of the IBU, there is now a threat of a standstill in many sectors.

"Such production stops would be a screeching halt for the economic recovery process", fears Jacobs, whose association speaks for over 240 steel processing companies.

IBU and WSM are now urgently calling for production to be adjusted to demand - a reproach that the steel manufacturers can no longer doubt.

In the course of the crisis, they reduced their capacities.

That was understandable at first, the customer industries believe the steelworks benefit.

After all, the demand fell sharply in spring and summer 2020.

Orders were canceled in a row, especially from the automotive industry.

The situation changed in autumn

Corporations such as Thyssenkrupp, Salzgitter or ArcelorMittal have therefore put their blast furnaces on the back burner or even shut them down completely, also to use the time for maintenance and repair work.

In the months of April to July, the quantities of crude steel produced in this country were therefore between 24 and 27 percent below the previous year, as can be seen from the monthly statistics of the German Steel Association.

"In 2020 there were significant production cuts and short-time work as a reaction to the corona pandemic, especially since the car manufacturers temporarily stopped producing during the first lockdown in the spring," says world market leader ArcelorMittal, who operates in Duisburg, Bremen, Hamburg and Eisenhüttenstadt around this country eight million tons of crude steel and thus a fifth of the usual total amount produced in Germany.

The situation changed in autumn, and that can also be seen in the figures.

In September, for example, the production deficit in steel production fell below ten percent.

After that, the amounts even increased month after month.

"The tipping point was between the end of the third and the beginning of the fourth quarter of 2020", describes WSM boss Vietmeyer.

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At that time the orders would have increased strongly.

And this boom continues to this day.

"Perhaps the steel manufacturers did not trust this upswing at first," he says in credit of the producers.

“But we've been complaining to them about a lack of supplies since November.

And many processors are slowly losing patience. "

"Restarting production was bumpy"

But they will still need them.

Thyssenkrupp has announced that the supply bottleneck will drag on for some time.

“There are waiting times due to the shortages.

We will not be able to process new orders until the third quarter at the earliest, ”says the Steel Europe division upon request.

20 to 30 percent of the capacities were taken out of the market in 2020.

But they would not be available again at the push of a button.

Because starting up blast furnaces and the downstream steelworks is a complex process that takes many weeks.

Customers know that too.

However, they do not show understanding.

"The restart of production was bumpy," complains IBU Managing Director Jacobs, for example.

In some cases, the companies are still on short-time work, but at the same time they are not afraid to reduce contractually guaranteed volumes independently.

This also affects the mechanical engineering sector, which after many months of falling orders is posting increasing order numbers again - and is now afraid of the long-awaited upswing.

The corona-bagged industry processes steel itself on the one hand, but also relies on suppliers.

"For direct steel purchases, there are currently sharp price increases, extended delivery times and increasing concerns about delivery bottlenecks among machine builders," reports Bianca Illner, head of the Business Advisory department at the Association of German Mechanical and Plant Engineering (VDMA).

Thyssenkrupp is skeptical about the boom

"At the same time, suppliers of finished parts sometimes get into difficulties - depending on the cost share of the raw material in the end product and the calculation basis on which the current price is based." In justified individual cases, it is now important to find adequate compromises in the supply chain, with individual machine builders already providing support for their suppliers had promised.

Illner questions with unmistakable criticism that the situation could have come to a head: “Against the background of production quantities that are still below the level of peak years and at the same time the EU's market foreclosure against deliveries outside of Europe, this is currently a surprising development that requires explanation raises the question of an artificially created shortage. "

Indeed, steelmakers have had some difficult years recently.

The reasons are punitive tariffs, cheap imports or structural change in the auto industry.

In addition, the industry itself is facing a radical change because it has to switch from CO2-intensive production with coke and coal to green manufacturing processes with electrolysis and hydrogen, and has to invest tens of billions for this.

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At Thyssenkrupp, the Steel Europe segment is now so much a problem child and loss maker that it is being considered a sale or a spin-off.

An offer from British competitor Liberty Steel was already on the table, but was ultimately rejected.

“In the end, the ideas about corporate value and the structure of the transaction were too far apart,” explains Thyssenkrupp CFO Klaus Keysberg.

Now a “future-proof steel structure” is to be pushed forward on its own.

However, Thyssenkrupp is skeptical about the current boom.

Short-time work was suspended in February, says a spokesman for the steel division.

“But Corona is not over yet.

Further developments will show whether we will need the instrument again. "

Because Corona presents the European and global supply chains with special, previously unknown challenges.

"In this respect, we don't want to speculate how sustainable the current upswing is." The cyclical nature of the steel industry is well known.