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Structural issues see Europe steel facing decline

Hans-Peter Merten | Photographer's Choice | Getty Images

Structural issues in the European steel making industry need to be addressed, according to Jeff Largey, mining analyst at Macquarie Group, as steel prices look set to decline.

Largey said oversupply was a "major issue," and argued that the reason for a lack of recovery in European steelmaking was domestic.

"At this point in Europe you probably have 200 million tons of crude steel making capacity. Demand has been running more say at 150-160 (tonnes)," he told CNBC Monday. "So any time prices start to show a little life more supply gets turned on and it just kills any sort of rally."

Largey added that some steelmakers had rested on their laurels, waiting for an improving macro picture to boost steel prices. But analyst forecasts make any significant price increases look unlikely.

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Carbon HRC, or hot roiled coil, European steel prices currently linger around $624 per ton, but in a recent research note, Societe Generale said prices were likely to fall in the near-term.

'Over supply' killing steel rally

"We expect the HRC price in Germany to be down quarter-on-quarter in (the third quarter) at $610 per ton before recovering towards the $630 per ton mark in (the fourth quarter)," it said.

The French bank downgraded its forecasts for the metal from $639 per ton to $629 for this year, and from $629 per ton to $619 next year. By 2018, Societe Generale sees prices reaching $559 per ton.

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To deal with this gloomy outlook, some steel companies are looking to diversify, which Largey said was the right approach.

German steelmaker ThyssenKrupp, which posted a 1.2 billion euro net loss for the first nine months of the year, has found steady earnings growth in its capital goods business. Capital goods are durables used to produce goods or services.

The company is now focussed on moving away from its traditional steelmaking and putting more emphasis on its the capital goods activities.

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"From a restructuring story, I love ThyssenKrupp as a stock as I think they are trying to move away from a very troubled industry," Largey said.

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Last week, Anglo-Swedish activist investor Cevian Capital raised its stake in ThyssenKrupp to more than 5 percent and said it could look to buy more. The company is currently negotiating the sale of its Steel Americas unit.

"You are getting closer to a key catalyst which is the exit of Steel Americas," Largey said. "They need to kind of exit this business to proceed with the transformation to a cap-goods engineering business."

By's Matt Clinch. Follow him on Twitter

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