Dow Jones STEEL MARKET OUTLOOK - March 2010

STEEL MARKET OUTLOOK
by Gianclaudio Torlizzi As predicted, European steel prices climbed higher over the last fortnight, and we believe that there is still more room to the upside. In our view, the second quarter should start on a strong foot: We expect that prices in both the long and flat steel segments will tick about 7 to 10% above current levels by the middle of Q2/10. According to our model, European wire rod prices may average about 7% above current levels, while hot-rolled coils may gain even more. The driving forces behind this continuous trend are sustained gains in raw material prices. Producers in Europe, CIS and the US have already increased their prices for Q2/10, even though they were met by buyer-resistance. At the London Metals Exchange (LME), the Mediterranean contract has gained 8% since late February. The market continues to be in contango, an indication that scarcity for near-term deliveries is not yet a concern. But falling inventory levels leave room for further buying activity. In Europe, demand for construction steels is likely to pick up as the winter comes to an end and building activity picks up. Already, lead times are lengthening and some steel producers’ order books are full for several months ahead. But margins are likely to be tight as input costs rise, and this may force some mills to cut back output rather than operating at a loss. China's appetite for iron ore meanwhile is unabated: Imports rose a further 6% from January to 49.38 million tons in February, though remained at a four-month low as inventories are starting to pile up, according to preliminary customs data. Supply restrictions in India and heavy rain falls in Australia also contributed to the upward price trend. We expect prices to rise even more at least until a new annual 2010 benchmark price is reached. BHP Billiton, Rio Tinto and Vale are taking a cue from higher spot prices for their benchmark negotiations. Observers say that if the mining companies don’t get anything close to current spot prices, they will likely sell on spot instead of under long-term contracts. According to market rumors miners proposed steelmaker a 40% rise now and a second 40-50% rise in april. The ‘core’ of the next iron ore agreement will be focused on quarterly (or even monthly) revisions. The situation in the coking coal market is similar: Prices came up substantially as supply and demand fundamentals for the market recovered. BHP settled a benchmark price with Japanese steel mills at 200 USD/t, up from last year’s benchmark price of 129 USD/t. But unlike in the years before, the 200 USD/t-agreement was settled for a quarterly period – April through June – marking a significant step away from the annual benchmark system that has been common in the coking coal market. As both markets move away from annual contracts to spot or quarterly agreements, mills face more volatility as they procure steel-making ingredients. As a consequence of volatile raw material markets, price movements in the steel market are also set to become more pronounced. Some European steel mills have already expressed concerns over increasing insecurity when procuring raw materials. Hedging not only in the iron ore and coking coal, but also in the steel market is hence set to become more common. This in turn may attract financial players who do not have a physical interest in the market, which in turn may add a speculative element to the market. gianclaudio.torlizzi@dowjones.com +39.02.58.21.9919