Dow Jones iron ore and steel market outlook

Steel Market Outlook
 
Flat steel prices have moved higher during the last two weeks and we expect this trend to continue in the next couple of weeks. Even if markets don’t expect a physical shortness in the short-term-view, rising input prices should put further upward pressure on flat steel prices in the next weeks. Our cost index for flat steel products points on its own to a price increase of 10% - 20% until late spring 2010. After the small set-back of long steel prices at the end of March, prices recovered during the last days. In the short-term-view our production cost indicator for long steel shows potential for some further sideward movement of long steel products, because the current increase in cost components has already lead to a significant rise of flat steel products. But with an ongoing bullish development on input factors, the current picture can change very rapidly.
 
Especially the iron ore market is critical. Last week BHP Billiton has announced that it has enforced a doubling of its iron ore selling price (120.08 USD per metric ton) to its Asian customers compared to the benchmark contract 2009. Besides that, the contract duration has been shortened from twelve to three months. Also the other two big iron ore suppliers Vale and Rio Tinto abandoned the one year benchmark contracts in favour of quarterly contracts. This means, that rising iron ore prices on the spot market will bite much more quickly into the cost structure of steel producers and will also build up upward pressure on steel prices faster. On the spot market, the price increase has moved on. In China iron ore prices have risen round about 6% since the end of March. This was partly caused by a boycott call of Chinese authorities regarding the iron ore imports from Vale, BHP Billiton and Rio Tinto. Also the price for coke coal inclined higher during the last days, even if the coal export figures from the world biggest port for coal exports - Newcastle port in Australia - reached pre-cyclone levels again.
 
With further progress in the economy recovery, the steel demand will increase. The current forecast of the World Steel association expects a rise in demand in 2010 by 9.2% compared to 2009. In a few days, the next update should be released. In our point of view, it is reasonable to expect an upward revision, because worldwide economic recovery seems to be stronger than anticipated until autumn 2009. According to the current capacity utilization figures released by the World Steel association (79.8%) we wouldn’t expect too much price pressure from rising demand at the moment. Only some special sectors could be affected. But with an expected further increase in steel demand, the trend of rising capacity utilization rates will continue, which should increase the pricing power of the steel makers the months ahead.
 
With the introduction of quarterly iron ore benchmark contracts, the development to a more volatile input price environment for steel markers reached another milestone. Rising input prices like coke coal and iron ore will now put steel makers much faster under pressure to raise prices. This means, that steel consumers should feel the pain of higher steel input prices on the spot markets much earlier than the years before. Therefore hedging on the steel market will become even more important as it is already. This is especially true in phases, when rising steel demand pushes capacity utilization of steel producers to higher regions again.

Gianclaudio Torlizzi
Dow Jones
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