STEEL ANALYSIS 25 FEBRUARY 2010

STEEL ANALYSIS 25 FEBRUARY 2010 Steel prices to rise further, driven by raw material costs. by Gianclaudio Torlizzi Further price increases are in the pipeline as steelmakers will continue to pass on higher input costs to consumers. Amid depleting stocks and improving demand in some industries and regions, buyers throughout Europe are already being forced to paying more for deliveries in March and beyond. Our model calls for further price increases in the flat steel segment over the next couple of months. The long segment meanwhile is set to rise even more. We anticipate that prices for wire rod and rebar may rise by 5% and more by Easter on the back of higher scrap prices. Already, suppliers in Europe, CIS countries, China and Japan are raising their offers for March. At the London Metals Exchange (LME), steel billets for Mediterranean delivery have already risen by 6% since early February. In Shanghai, where trading was suspended during the holidays, gains were slightly less pronounced: Rebar has risen by around 5%, while wire rod posted gains of roughly 3% since early February. The main drivers behind this trend continue to be higher production costs on the back of soaring iron ore, coking coal, and scrap prices. All of these materials have become more expensive in recent weeks and months, and are set to gain substantially more value. Iron ore spot prices are currently nearly 75% above last year’s benchmark prices. While many analysts anticipate that annual contracts this year will be around 40% higher on year, we believe that there is substantial risk to the upside. Main driver is China. Chinese ore imports receded in January due to bad weather and New Year’s celebrations, but will likely pick up again as the country produces more steel. At the same time, domestic ore production remains slow. Coking coal, too, is set to become more expensive as China’s demand for that material will remain robust and physical scarcity may occur. Steelmakers told Dow Jones Newswires that they anticipate annual contract prices to be 80 to 100% above last year’s. In addition, scrap material is becoming scarce in Asia amid growing demand from China and South Korea. Similarly, European demand is vivid and stocks deplete. German industry association BVSE said it expects prices to rise in March on the back of improving demand. While the steel forward curves are still in contango – an indication for oversupply in the near term - there is also evidence of improving steel demand in European countries. Developments in the German and French auto sectors are encouraging, though worldwide overcapacity in that market continues to be a negative. In Italy, mills still fret that buyers won’t be willing to pay higher prices due to lackluster end-user demand. Nevertheless, steel production in Europe and elsewhere has been accelerating. Worldwide capacity utilization rates are stabilizing and were up by 11.6% on year at 71.9% in January, according to Worldsteel. However, in order for plants to run economically, utilization rates need to be at 80% or higher. Steelmakers will hence face another tough year with tight margins, though 2010 will be a lightyears improvement over 2009. Overall, we anticipate that conditions in the market will continue to be very fragmented by grades and regions. Purchasers should carefully weigh stock levels and availability of material as economic conditions slowly improve. The strengthening US-dollar has not significantly curtailed commodity and energy prices in recent weeks, and bank analysts anticipate that the correlation between greenback and commodities will remain weak. However, the weakening euro will make US-denominated metals even more expensive. gianclaudio.torlizzi@dowjones.com +39.02.58.21.9919