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26. Februar 2008

Global steel prices: Sky is the limit

LONDON (UK): Global steel prices could hit new peaks in 2008, thanks to skyrocketing raw material, energy and freight costs, coupled with tighter supplies because of falling exports from China.

A looming recession in the United States poses a risk for demand, but many believe requirements from the developing world and China will help support prices.

And, after several years of working to develop financial futures for steel, the London Metal Exchange’s billet contracts are hitting the ground as global steel prices eye new peaks. “In our view steel prices will remain high because underlying raw material costs continue to rise,” JP Morgan analyst Jeff Largey said.

Japanese and South Korean mills and Brazilian mining giant Vale agreed a 65 percent jump in the price of iron ore, the major ingredient in steel making, in annual contract talks. Spot prices are rising too, partly due to shipping tightness. Coking coal prices have surged on the back of tighter supplies after severe flooding in Australia chopped off some 25 percent of total seaborne supply for up to six months.

In Europe, the price of rebar, produced with steel billets, jumped to 570 euros ($840.1) per tonne in February from 440 euros in December. The price of hot-rolled coil (HRC), a semi-finished product in carbon flat steel, has risen over 500 euros in from around 480 euros in the same period.

Several banks have upgraded their steel price forecast recently to reflect the rising cost of steelmaking. Citibank expects hot-rolled coil (HRC) prices for 2008 to be at $700 per tonne, up 12.9 percent from a previous forecast.

“Exports from China have been weaker and causing inventories in Europe to fall — resulting in more price pressure,” UBS analyst Andrew Snowdowne said.

China has raised its export tax for steel billets to 25 percent, effective from January 1, a move which slashed supplies to Europe, causing prices to rise. ArcelorMittal, the world’s largest steelmaker, said it will increase flat carbon steel prices in Europe by 12-15 percent as of April. “I think that’s just the beginning,” Largey said, adding: “Steel makers prefer to avoid margin compression and they will have to announce further price increases in order to fully pass along input cost inflation.”

Decoupling? On the demand side, debate is raging over whether China and developing countries have decoupled from the United States, where the economy is rapidly deteriorating. Many believe a sharp slowdown poses a risk for the rest of the world, but despite that, appetite for steel is expected to remain robust in 2008.

Much of that is because of increasing infrastructure spending in emerging countries such as Brazil, Russia, India and China, also known as BRIC countries. “Global demand for steel is expected to remain strong in 2008, particularly in the BRIC economies and in the Middle East,” analyst David Thurtell at BNP Paribas said. Figures from the International Iron and Steel Institute (IISI) show the apparent steel use fom BRIC countries accounted for 40 percent of global usage in 2006. The institute forecast it will rise to almost 45 percent this year.

“Large scale public investment in structures in emerging markets provides the basis of a strong steel demand outlook in 2008,” Thurtell said but warned a possible slowdown in the U.S. could have a negative impact on demand.

“Slowing industrial production cycles, on the back of weaker manufacturing, housing and auto sector performance, will likely impact adversely on steel demand in OECD countries and, to a lesser extent, Emerging Markets,” he said.

The price of long products such as billets and rebar have surged dramatically since the beginning of the year, analysts said, thanks to rising costs and scrap prices in Europe. “Rising scrap prices, higher orders, and supply constraints have seen long product prices in Germany up by 130 euros per tonne over the past month,” Snowdowne said in a research report.

Rebars are mainly used in construction sector while, flat products such as hot and cold rolled coils are raw materials for automotive industry and white goods. Futures for steel billets are making their debut on Monday.

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