STEEL MARKET FORECAST BRIEFING

STEEL MARKET FORECAST BRIEFING Analysis of the global flat product and raw materials markets

North America , Europe , Asia , Emerging Markets STEEL MARKET BRIEFING Table of contents Page. 1

Executive Overview

Page. 6

North American Markets -

Page. 10

EU-25 countries

China, Japan, South Korea, Taiwan & ASEAN countries

Page. 18

constrained nature of this economic slowdown are creating a very volatile market, with the potential to significantly misread developments. There is no doubt that there has been a major buyers strike since August/ September. In our European analysis, we highlight how distributors in far greater extent than normal by changing the way they supply physical orders, but the process is not limited to European service centres.

underlying decline in steel demand – in our crude steel analysis, we are forecasting global output cuts of around 20% year-on-year. At some point, service centres will have to go back to mills to secure material for orders, at which point lead times will stretch out, mills will ramp up production

Emerging Markets -

The recent gyrations in steel supply and demand coupled with the credit-

Meanwhile production cuts are cutting steel output by greater than the

Asian Markets -

A vicious stock cycle ahead

particular are reacting to the situation by running down inventories to a

European Markets -

Page. 14

Nafta countries

November, 2008

CIS, Middle-East, South America & South Asia

levels, increase purchasing of raw materials and push up prices. Yet underlying global demand is likely to be 10-15% lower, particularly in the first half of 2009, so there is the clear risk that steel output will rise too much and prices come slumping down again. Indeed, this is our base case outlook.

GFMS-MC Steel price indices (November 2008) (Jan 03 = 100) Index

MoM

YoY

STEEL MARKET FUTURES BRIEFING Detailed analysis and forecasts on the long products and raw material sectors

Scrap

292

(34.1%) (48.7%)

Slab

333

(28.3%) (22.2%)

Plate

387

(18.7%)

0.4%

HR

295

(19.0%)

(6.0%)

CR

249

(17.9%)

(3.6%)

HDG

255

(15.9%)

(0.5%)

GFMS Metals Consulting launched the Steel Market Futures Briefing at the beginning of March. This detailed Monthly Report (plus regular Updates) covers billet, rebar, wire-rod and related raw materials such as scrap, HBI and DRI. We believe that the upcoming launch of steel futures trading on the LME will increase the need for detailed analysis on all aspects of the long products sector. Companies can subscribe just to the regions that affect their business - North America, Europe, Asia and Emerging Markets. This approach offers subscribers the opportunity to make massive savings compared to some other Published by: GFMS Metals Consulting Ltd Hedges House, 153-155 Regent Street London W1B 4JE, UK Tel +44 (0) 20 7478 1777 Fax: +44 (0) 20 7478 1779 [email protected] www.gfms-metalsconsulting.com Contributors: Neil Buxton, Philip Klapwijk, Paul Walker, Shairaz Ahmed, Nikos Kavalis, Rob Smith

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STEEL MARKET FORECAST BRIEFING

6%

Chinese industrial production year-on-year % change* IP may struggle to get back to double-digit growth until 2009

US IP* year-on-year % change

22 20

4%

18

2%

16 14

0%

12

-2%

10 8

-4%

6 -6% Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct 05 06 06 06 07 07 07 08 08 08 Source: Economy.com, GFMS-MC

*3-month aver.

4 Oct 06

Jan 07

Apr 07

Jul 07

Oct 07

Jan 08

Source: Economy.com, GFMS-MC

Apr 08

Jul 08

Oct 08

*3-month

The inventory cycle is not unusual – what is unusual is that

has fewer constraints on finance and planning. Here

the credit crisis has resulted in a dramatic re-assessment

the devil lies in the detail. How much of the planned

of risk, and a much quicker and deeper order reduction to

expenditure was already planned, what will it be spent

conserve cash. In turn, that has stimulated a much more

on etc. Capital investment already accounts for around

dramatic cut in output as orders have simply disappeared

40% of the economy, much of which is public-sector

– whatever the price offered. The price upturn could be

led. So announcing the equivalent of a 15% of GDP on

sharp, but the probably response of higher output will bring

infrastructure expenditure is just repeating what it is

them down equally quickly.

already doing. If this is new, then this is a major addition to steel demand, if it is not (and politicians have been

ECONOMIC BRIEFING

known to recycle promises), then it doesn’t really change anything.

Infrastructure expenditure and steel consumption

OECD declines

The last few weeks have seen a number of governments

There is ongoing weakness in the OECD LEI. It fell again

boost investment in infrastructure as a means to combat

in September and fell to 94.3 – an acceleration in the rate

the economic weakness. While the Chinese announcement

of decline. There is now no global market or region that is

was by far the biggest, its actual breakdown was ill-

unaffected by the current economic situation.

defined, and other governments appear to be actively considering it. What impact will this have on steel

Spreading weakness in Asia

consumption? Including all the Chinese as “new”

Economic weakness is spreading to other Asia. For example

expenditure and doing a back-of-the-envelope calculation

Malaysian IP fell 1.7% month-on-month in September.

on the rest and we are over US$1trillion. The proportion

The sharp decline in Chinese imports has a major impact

that goes to steel will vary by region – theoretically a region with significantly lower labour costs will consume a proportionately higher volume of steel per dollar spent. Nevertheless this is a big boost to overall steel demand. Construction probably accounts for around 55% of total steel consumption, although only around 35-40% of flat

OECD composite leading indicator 103

There is no end in sight for the negative outlook for OEC D economies

102 101

products. Yet there will also be spin-offs. Rail investment

100

needs freight cars for example – made of HR plate, while

99

construction requires backhoes and other machinery.

98 97

Our concern is more prosaic. A lot of these commitments

96

will take some time to put in place –up to 18 months

95

or even longer once financing, planning and bidding

94

is approved. At that point in time, we would expect a cyclical manufacturing recovery to begin anyway, and that will alleviate much of the pressure on the steel market. The exception may be China, whose government

2

Sep Dec 06 06

Mar 07

Jun 07

Sep 07

Dec 07

Mar 08

Jun 08

Sep 08

Source: OEC D, GFMS-MC

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

STEEL MARKET FORECAST BRIEFING

60

Institute of Suppy Management Purchasing Managers' Index (manufacturing)

EU industrial production yearon-year % change*

5.0 4.0

55

Expansion

3.0 2.0

50

IP is decelerating quickly

1.0 45

C ontraction

40

This index collapsed in September & October

0.0 -1.0 -2.0

35 Oct 06 Feb 07 Jun 07 Oct 07 Feb 08 Jun 08 Oct 08

Sep Dec 06 06

Mar 07

Jun 07

Sep Dec 07 07

Source: Eurostat, GFMS-MC

Source: ISM, GFMS-MC

Mar 08

Jun 08

Sep 08

*3-month

on other Asian exports as China acts as a final-stage

September and above 10% year-on-year in June and July.

manufacturing sector.

The economy appears to be decelerating quickly.

In Taiwan, GDP fell 1.0% in Q3 – a sharp slowdown

India provided a rare piece of economic optimism.

after growth of 6-7% in the first half of the year. Sharply

Construction growth remained strong during Q3 – up 9.7%

declining export shipments to China and the West are the

year-on-year, albeit this is a slight slowdown from the

primary reasons, but rising unemployment is weakening

11.2% year-on-year growth in Q2. A sharp cut in interest

domestic consumption as well. With the economy relying

rates to 5.5% from highs of 9% appear to be ensuring

on external consumption, we see no immediate turnaround,

that sufficient liquidity is in the economy. However, we

although interest rate cuts, a declining currency and

expect a worse performance in Q4 as the export-oriented

government infrastructure expenditure should all be

sector struggles and consumer confidence is hit.

positive. In South Korea, IP collapsed in October – falling In Japan, GDP fell 0.4% in Q3 on an annualized basis

2.4% year-on-year – compared with growth of 6.4% in

after a massive 3.7% annualized decline in Q2. Exports

September, and domestic and export demand will continue

continued to weaken, partly as a result of the resurgent

to fall through the remainder of the year. The massive

yen, but also due to declining demand in export markets.

depreciation of the won is failing to help exports.

Capital investment, typically led by export-oriented firms, also fell. Deflation continues to be a factor, further

US PMI slides again

depressing household consumption and the government

The US PMI fell again in October to stand at 38.9 – its

appears largely bereft of ideas to improve the world’s

lowest level since the early 1980s. The manufacturing

second largest economy. IP fell 3.1% month-on-month in

outlook is awful. Part of the particular collapse in the ISM

October and was 7.1% lower year-on-year. On the brightish

is the need to conserve cash. At the corporate level, this

side, housing starts over September and October were

means reducing purchases while trying to extend accounts

up over 30% on average, but this reflects the abysmal

payable. This then has a knock-on impact throughout

numbers of a year earlier rather than any fundamental

the supply chain. New export orders have also dropped,

strength.

offsetting the one positive from earlier in the year. New orders for manufactured goods dropped 6.2% in October

Hitting 29.4 in October, Japanese consumer confidence has

suggesting further weakness to come.

never been so low, meaning that the latest fiscal giveaway is likely to go straight into savings rather than boosting

US IP now running at a 5% lower pace

consumption. The strengthening yen continues to depress

Although US IP bounced back in October, it was not

large exporters such as the electronics and automotive

enough to offset the major declines in the previous two

sectors, and we see little chance of a domestic-led upturn

months – IP was revised downwards to a fall of 3.7% in

in economic activity to soften the blow of weakening

September. In year-on-year terms however, the decline

exports.

is accelerating. It is now down 5% year-on-year, and we expect further deceleration through to Q1 at least.

In Thailand, IP grew 2.0% year-on-year in October, but this is a sharp slowdown from 4.3% year-on-year in GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

3

STEEL MARKET FORECAST BRIEFING Non-residential up IISI Steel Production (y ear-on-y ear % change) 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% Oct Apr Oct Apr Oct 06 07 07 08 08 C hina

World excl. C hina

IISI Steel Production (year-on-year % change)

For the last two months, non-residential expenditure has fallen month-on-month, and we argued that this was an indicator ready to fall off a cliff. In fact it then rose in September – up 1.2% month-on-month. We still think that this was a one-off and the collapse in business confidence in October will feed through to a much weaker dataset next month, but the resilience of this number to date has been astounding. What was much less surprising was the ongoing fall in automotive sales – down to 10.5m units on an annualized basis in October – the lowest level since the early 1980s.

Eurozone IP slides Eurozone IP fell 1.6% month-on-month in September and was down 2.4% year-on-year. We expect no improvement

15%

in this indicator given continued negative readings on

10%

purchasing surveys. It was dragged down by Germany, which fell 3.6% month-on-month. There is a whole host

5%

of negative news to choose from. The EU Commission’s

0%

eurozone economic sentiment indicator plunged in October

-5%

to 15-year lows of 74.9 compared to the long-term average

-10%

of 100. In Germany, the IFO index plunged to 85.8 in

-15% Oct 06 Apr 07 Oct 07 Apr 08 Oct 08

years.

Global

G7

November from 90.2 in October – its lowest level in 16

China weakens in October Q3 Chinese GDP growth slowed to 9.0% year-on-year,

Daily Rate Steel Production (year-on-year % change) 15%

while Q4 looks set to be even weaker. Industrial production came in at just 8.1% year-on-year growth in October, as export growth continues to decelerate, although remains

10%

positive – up 19.1% year-on-year compared to 21.3% in September. Nevertheless domestic consumption continues

5%

to compensate to some extent – up 22% year-on-year in October. Chinese fixed asset investment continues to

0%

provide a bulwark against further slowdowns, although the

-5%

rate of growth did slow. It was up 27.2% year-on-year for

-10% Oct 06 Apr 07 Oct 07 Apr 08 Oct 08 World excl. C hina

Global

IISI Steel Production (y ear-on-y ear % change) 15% 10%

first nine months. Government-led reconstruction efforts after the earthquake continue to support this number, although a weakening property market will be a negative in the short term.

CRUDE STEEL BRIEFING Crude steel production fell 12.1% year-on-year in October,

5%

and we believe the fall will be even greater over the

0%

remainder of Q4 as cutbacks intensify over the remainder of the year.

-5% -10%

The biggest volume cut was in China – down 16% year-

-15% Oct 06 Apr 07 Oct 07 Apr 08 Oct 08 Mature

4

the first ten months of 2008 compared to 27.6% in the

Emerging

on-year in October – but the biggest proportionate fall was in the CIS – down nearly 33% year-on-year, as Ukrainian and Russian production collapsed on a lack of export and

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

STEEL MARKET FORECAST BRIEFING

EU27 output down 10%.

GFMS Metals Consulting’s research capabilities

Yet the November numbers will be even lower. We expect

GFMS Metals Consulting is ideally placed to carry out

similar year-on-year declines for China and the CIS, but

market analysis on the steel and raw materials sectors.

NAFTA numbers are likely to be down by around 30%, and

In addition to our core research team based in London,

EU27 numbers are likely to be down by around 20% as

we have analysts based in the key steel producing and

most EU companies did not start to cut output until late

consuming regions - Australia, China, India, Russia,

October/early November with the exception of Corus and

Germany, Spain, France and North America. The type

ArcelorMittal. Output in Asia excluding China was virtually

of projects that GFMS Metals Consulting has worked on

flat year-on-year in October – incredible given that Japan

include:

domestic orders. NAFTA output was down nearly 15% and

and Taiwan are in recession – see below. We note that Indian output will also fall in October and other Asian

•

output could be 10-15% down year-on-year in November.

The outlook for for the structural sections market in the EU and North America

Overall, we therefore expect November and December output to be down around 20% year-on-year globally.

•

The prospects for global market for carbon and low alloy plate

This is an unprecedented response to weaker price and demand conditions, and will quickly act to bring down any

•

excessive inventories that were built up in the global steel

A strategic analysis of the plate market in Europe and the Middle East

market over Q3 – and as we have noted previously, these were not particularly excessive in most markets. This will set the stage for a bounce-back in pricing in Q1. While we

•

An assessment of the flat-rolled steel market in North America

are in troubled economic times, global construction and industrial production demand is not down by 20%, and

If you require independent market analysis on any aspect

this crude response will remove inventory through the

of the steel industry please contact:

steel system quite quickly.

[email protected]

Five year forecasting service on the flat product markets out to 2013 The next bi-annual report will be released later this month. The Steel Market Strategic Briefing was launched in June 2007 and there are now subscribers in over 15 different countries. The Steel Market Strategic Briefing is the most comprehensive and cost effective source of analysis on the long-term prospects for the flat product steel industry. Although the report covers all the major regional markets – North America, China, Europe, Asia and the Emerging Markets – the service is structured to allow companies to subscribe just to the regions that affect their business. This enables subscribers to enjoy significant savings compared to other research services. Act now to secure the special rate. We have attached a brochure highlighting the detailed nature of the analysis. As a subscriber to the Steel Market Forecast Briefing, you will receive a significant discount on the normal subscription. Please contact: [email protected]. GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

5

NORTH AMERICAN STEEL BRIEFING

US prices ($ per metric tonne)

US prices ($/metric tonne) 1,600

1,800

1,400

Shredded scrap Slab import

1,200

Plate

1,600

HDG C R coil HR coil

1,400 1,200

1,000

1,000

800

800

600

600

400 400

200

200

0

Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul 03 03 04 04 05 05 06 06 07 07 08 08

Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul 03 03 04 04 05 05 06 06 07 07 08 08 Source: GFMS-MC

Source: GFMS-MC

NORTH AMERICAN STEEL MARKET BRIEFING

although this will fade as spot prices move below contract price levels of last year. On the upside:

Prices show no sign of bottoming yet

•

US mills continue to do deals at lower prices with some

Holes in inventory will appear – inventories

activity around the $640-660/ton for HR coil in the early

dropped another 725,000 tons in October in

November. Nevertheless, by the end of the month, most

North America to 11.4m tons – well below the

transacted deals were below $600/ton, and even as low

previous trough in February 2008, which triggered

as $500/ton for some stock deals. We think a bottom

substantial buying, and this is occurring even as

may appear in December of around $500-600/ton for the

sales volumes are down. November deliveries to

following reasons:

distributors will be even lower and inventories will fall again in November and probably through December as well. Inventories will be run down to

On the downside:

•

Current US prices are above international prices,

very low levels as service centres conserve cash

putting pressure on mills to move closer to import

and will be reluctant to order from mills – see

prices – good-quality material from Brazil or Turkey can be landed at below $600/tonne cif Gulf ($545/

•

• •

•

European section for details. Output cuts are severe – output was just 1.35m

s.ton).

tpw in the third week of November – a fall of 35%

Economic activity is down 5% year-on-year (IP

from previous levels and greater than the fall in

numbers – see Economic Briefing) and automotive

both real and apparent consumption. The numbers

output will be down around 25% year-on-year in

will stay low through November and into December

Q4 – see below.

– see below.

US service centre sales were down 22% year-onyear in October, suggesting continued de-stocking

With inventories at end-users and distributors continuing

by end-users.

to decline and imports rising slightly (but not significantly),

There are ongoing pushbacks from contract

there does remain the possibility of a squeeze developing

customers that continue to re-sell material,

early in Q1, and we continue to expect a bounce off a bottom of around $500-600/ton at that time.

NAFTA Steel Production & Forecasts (000 tonnes) 2004

2005

2006

Q3 07

Q4 07

2007

Q1 08

Q2 08

Q3 08

Q4 08

2008

Canada USA Mexico

16,459 98,522 16,720

15,516 94,339 16,594

15,475 98,459 16,315

4,165 24,570 4,286

4,095 25,133 4,431

15,757 98,182 17,306

4,250 25,465 4,588

4,171 25,289 4,750

4,262 25,027 4,538

3,650 20,500 4,000

16,333 96,281 17,876

Total NAFTA YoY % change

131,701 7.6%

126,449 (4.0%)

130,249 3.0%

33,021 (1.0%)

33,659 10.6%

131,245 0.8%

34,303 9.8%

34,210 2.6%

33,827 2.4%

28,150 (16.4%)

130,490 (0.6%)

Source: IISI, GFMS-MC

6

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

NORTH AMERICAN STEEL BRIEFING

Automotive output Jan-Sept 2008 (year-on-year % change)

Contract pricing in the auto sector Three months ago, we thought that US mills would be able to get an increase in 2009 contract pricing, albeit not as

10%

much as they hoped, and forecast a number around $850-

5%

900/ton. That appears to be substantially over-optimistic. The dire strait of the automotive sector and potential

0%

bankruptcies in automotive suppliers and potentially one

-5%

of the “Big Three” means that they will be reluctant to

-10%

requirements next year, giving them some negotiating

sign higher priced contracts and may well cut volume room with suppliers.

-15%

Until recently, suppliers held the upper hand with just

-20% USA

C anada

Mexico

4 major steelmakers able to supply significant volumes of auto-grade steels (ArcelorMittal, US Steel, Severstal

Source: Ward's Automotive, GFMS-MC

NA and AK Steel to a lesser extent) but with US buyers possibly taking up to 20% less on contract volumes (and

Output stays low

possibly even less), they may be able to trade volume

Output continues to slide, with ArcelorMittal confirming

for price, and get the mills to compete with each other to

a 35% cut in Q4 output. Recent announcements have

secure business. With spot prices now around last year’s

included a number of producers announcing complete

contract base price of around $600/ton, steelmakers

shutdowns over the holiday period. It would not be

may now be willing to take a rollover on pricing to secure

inconceivable for the industry to operate at below 50%

business volumes.

over the holiday period – it currently stands at 56% in the third week of November.

Some costs are rising despite dire demand conditions

Sales to auto sector will plunge further

On the other hand, steel mills will be facing some higher

Auto sales numbers in October were down to 10.5m units

costs, which they will try and pass through. US steel mills

on a seasonally-adjusted annualized basis. The equivalent

did not pay the big increases in metallurgical coal prices

number in October 2007 was 16.0m units – a fall of 34%.

that seaborne buyers did in 2008 as they tend to settle in

Auto output had already been cut by around 15% year-on-

October/November of the prior year and therefore they

year during the first nine months of the year in the USA

did not get the impact of the Australian floods. However,

and Canada, so the cuts over the final quarter will be even

recent settlements in October for US metallurgical coal

higher – the Big Three are all down at least 25% year-on-

contracts in 2009 will see them pay close to the seaborne

year and are shutting some plants for extended periods in

prices of 2008 – around $275-300/tonne delivered. This is

order to reduce inventory sitting on dealers’ floors.

a cost increase of around $80/tonne of steel produced for integrated mills. They will get some relief from lower iron

Interestingly Mexican output was up 5% over the same

ore, scrap and ferro-alloy prices, but overall we expect the

period thanks to previous investment in new facilities. We

integrated mill structure to be largely flat. Minimill costs

believe that Mexican output of vehicles could be higher in

will clearly move in line with scrap, but they tend to have

2008 than in Canada for the first time. With Canada more

less exposure to the automotive market and run their

reliant on the Big Three (it has some transplant, but not

contract prices on a base plus scrap surcharge system.

as many) than Mexico, we believe the upcoming shakeup in auto production facilities will have a greater impact

Plate market erodes and has further to go...

there than in Mexico with a consequent impact on auto

ArcelorMittal announced a price of $1,280/ton ex-works

steel consumption. In addition, committed expansions in

for A36 in December, while Nucor was still holding out for

Mexico, plus the possibility that it may get a new VW plant,

$1,350/ton. However, we believe that transaction prices

could see output rise further in the medium term. Despite

are well below this and will continue to decline. Distributors

this, we still expect output to decline in 2009, as it remains

are reluctant to purchase prior to year-end and lead times

dependent on the export market (primarily the USA) for up

at mills are now well down. Stockist deals in our view are

to 50% of sales, while Mexican domestic automotive sales

up to $200/ton below the announced levels, but plate

are also likely to decline next year.

to end-user business is a bigger proportion of business than in coil products, and mills may be hoping that endusers in industries such as wind towers or rail cars will

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

7

NORTH AMERICAN STEEL BRIEFING

US weekly steel production (000 s.tons)

North American* steel inventories (000 tons) 17,000

2,300 2,200

16,000

2,100 Inventories are below historic lows

15,000

2,000 1,900 1,800

14,000

1,700 Output has plunged to 1.35m tpw in the third week of November

1,600

13,000

1,500 12,000

1,400 1,300

11,000 Oct 05

Apr 06

Oct 06

Source: MSC I, GFMS-MC

Apr 07

Oct 07

Apr 08

Jan 07

Oct 08

*USA plus C anada

Apr 07

Jul 07

Oct 07

Feb 08

May 08

Aug 08

Source: AISI, GFMS-MC

be less aggressive in demanding cuts, given that they

elevated pricing levels by Q1. Turkish plate exports for

have already factored in the price in their forward sales

example are being quoted at around $650/tonne fob

contracts.

for the US market – around $700/tonne cif Gulf. This is a $700/tonne differential to domestic prices and is not

...as margins are bound to contract

sustainable, and therefore we expect US prices to move

They may therefore avoid stockist business, who will

below $1,000/ton in Q1. We expect plate import volumes

demand greater cuts, prior to the end of the year in

to rise in Q1 as a result.

order to try and maintain prices. However, even contract business is under pressure in the strongest of sectors. We understand, for example, that even wind tower

Scrap prices bounce back from “oversold” levels

operations, where the project owner has known forward

Shredded scrap is now back to $250/l.ton from lows of

revenues for contracts with power companies, have been

below $140/l.ton, although several mills that we spoke to

unable to secure credit in order to finance the purchase of

suggested that they had not actually been able to secure

equipment.

material at that very low price in any volume. Domestic mill purchasing has improved from the extremely low

Increasing imports may add to the downward pressure

levels, but with weekly output of just 1.35m tpw and

Plate imports are now more widely available (both volumes

Some purchasing from export yards has helped sentiment

and sources) for well below $800/tonne, so the margin

improve in domestically-oriented facilities.

dropping, the ongoing weakness is hardly surprising.

is opening up and mills will not be able to maintain their

Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09

Ferrous scrap (1) 150 200 225 300 350 370 350 300 225 180 200 225 250

yoy % change (51%) (41%) (43%) (22%) (13%) (33%) (39%) (50%) (64%) (69%) (43%) 13% 67%

Slab import (2)

450 400 400 425 450 460 450 420 380 350 350 350 350

yoy % change (20%) (29%) (31%) (36%) (38%) (50%) (55%) (61%) (65%) (68%) (59%) (53%) (22%)

Plate (3) 1,200 1,050 950 900 900 925 950 900 750 700 700 700 750

2003 ave. 138 265 339 2004 ave. 251 81% 472 78% 725 2005 ave. 227 (9%) 448 (5%) 856 2006 ave. 244 7% 473 6% 896 2007 ave. 303 24% 519 10% 919 2008 ave. 417 38% 800 54% 1,273 2009 ave. 270 (35%) 399 (50%) 830 (1) shredded ex-yard Midwest in $/long ton (2) cif Gulf port (3) ex-mill Midwest Source: GFMS-MC

8

yoy % change 30% 19% 2% (7%) (13%) (19%) (34%) (38%) (51%) (55%) (55%) (52%) (38%)

HR (3) 750 620 660 760 820 850 750 650 600 550 550 580 600

yoy % change 29% 2% 5% 3% 2% (23%) (38%) (45%) (49%) (51%) (45%) (30%) (20%)

CR (3) 840 780 780 840 880 950 850 730 680 630 630 660 680

yoy % change 27% 13% 9% 2% (1%) (21%) (35%) (43%) (47%) (48%) (43%) (29%) (19%)

HDG (3) 940 880 880 940 980 1,050 950 830 780 730 730 760 780

yoy % change 31% 19% 13% 11% 2% (18%) (33%) (39%) (42%) (44%) (39%) (22%) (17%)

114% 18% 5% 3% 39% (35%)

319 674 604 646 588 929 670

111% (10%) 7% (9%) 58% (28%)

415 771 709 748 672 1,027 755

86% (8%) 5% (10%) 53% (26%)

445 800 738 803 730 1,105 855

80% (8%) 9% (9%) 51% (23%)

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

NORTH AMERICAN STEEL BRIEFING US forecast prices ($ per metric tonne)

US forecast prices ($/metric tonne)

1,800

1,600

Shredded scrap

1,600

Slab import

1,400

Plate

1,400

Forecast

1,200

1,200

1,000

HDG C R coil HR coil Forecast

1,000

800

800

600 400

600

200

400

0 Nov 06

May 07

Nov 07

May 08

Nov 08

May 09

Nov 09

Source: GFMS-MC

Nov May Nov 06 07 07 Source: GFMS-MC

May 08

Nov 08

May 09

Nov 09

The extent to which scrap may rise further is somewhat contingent on scrap inventories. Over Q2 and into the summer, inventories were low and scrap yards were active buyers. This continued through September despite falling scrap prices. Only in mid-October did buyers begin to stop shredders and by that time we believe that reasonable inventories had been accumulated, and sales volumes declined. Since then, yards have been trying to restrict inflows of obsolete scrap and have been paying very low prices to collectors. Industrial scrap flows have also fallen, but this reflects lower industrial activity. The move by export yards to begin buying again suggests that they have now run down their inventories, but most yards are probably well filled. An expected pick-up in purchasing during Q1 as operating rates improve slightly will therefore run down inventories quite quickly given the lag between re-starting shredders etc. so the price run-up could be quite quick, although we feel a peak will be around $350/l.ton. Pig iron purchasing was strong during the first half of 2008 and this resulted in rising imports through to Q3 reflecting the lag between purchasing and delivery. Much of that went into inventory and there has been little buying since the summer. That inventory is unlikely to be worked through until Q1, and we expect no buying until then, although may pick up at that point for deliveries in Q2 and Q3, but probably at lower levels than in 2008 given expected lower operating rates at flat product minimills.

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

9

EUROPEAN STEEL BRIEFING

EU prices ($/tonne)

EU prices ($/tonne) 1,600

1,400

Shredded scrap

1,400

Slab import

1,200

Plate

HDG C R coil HR coil

1,200 1,000

1,000 800

800 600

600

400

400

200

200

0

Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul 03 03 04 04 05 05 06 06 07 07 08 08

Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul 03 03 04 04 05 05 06 06 07 07 08 08 Source: GFMS-MC

Source: GFMS-MC

EUROPEAN STEEL MARKET BRIEFING

A key issue for mills may be the contract volumes that buyers will commit to for next year. If these decline,

Mills give up on Q4

then mills will have more to sell to spot or quarterly and

European mills have largely given up on Q4. Spot material

therefore result in a more price competitive market.

is widely available below €500/tonne ex-works for HR

Increasingly aggressive cutbacks in automotive production

coil and down to €450/tonne even in northern Europe

announcements therefore bode poorly for the mills. They

and there appears to be little attempt to uphold prices,

may do well therefore to keep the quarterly prices above

as discounted offers from the stock floor for immediate

€500/tonne, although they may try for as high as €550/

delivery are common. In southern Europe, the situation

tonne – wary of an upturn in the market that caused them

is even worse as Riva has dropped prices to well below

to lose out in Q1 2008, but we think that €500/tonne is a

€400/tonne and appears to be entertaining offers as low as

more realistic number, and it is certainly possible that it will

€350/tonne in an effort to generate some business.

hit €450/tonne.

Nevertheless, as we have noted previously the key for

2009 input costs will fall...

European mills is the quarterly price level given that

EU mills should benefit from lower iron ore and

the majority of non-contract sales are operated on this

metallurgical coal costs. It is our view that iron ore costs

basis. They are clearly looking to minimize their own and

will be 15% lower on an fob Brazil cost and even more

distributor inventories by cutting output and limit imports

on a cif basis as freight rates have come down. Pellet

by short lead times and lack of forward price offers.

prices will fall much faster as the premium comes down

EU Steel Production & Forecasts (000 tonnes) 2004 20,769 46,374 28,437 17,684 13,758 41,293 168,315 5.2%

2005 19,325 44,512 29,147 18,212 13,272 39,935 164,403 (2.3%)

2006 19,863 47,230 31,246 18,339 13,952 41,530 172,160 4.7%

Q3 07 4,533 12,027 6,881 4,452 3,475 9,749 41,117 (0.7%)

Q4 07 4,196 11,976 8,506 4,634 3,624 10,633 43,569 1.3%

2007 19,247 48,551 31,866 18,658 14,508 41,950 174,780 1.5%

Q1 08 4,870 12,066 8,494 4,599 3,628 11,197 44,854 (0.5%)

Q2 08 5,131 12,348 8,667 5,006 3,744 11,262 46,158 2.5%

Q3 08 4,567 11,819 6,885 4,845 3,581 10,389 42,086 2.4%

Q4 08 4,100 11,500 7,200 4,500 2,900 9,800 40,000 (8.2%)

2008 18,668 47,733 31,246 18,950 13,853 42,648 173,098 (1.0%)

Poland Czech Romania Other EU 12 Total EU 12

10,592 7,032 5,851 13,688 31,312 35.1%

8,607 6,189 5,950 13,802 34,548 10.3%

10,020 6,861 6,299 9,054 32,234 (6.7%)

2,578 1,706 1,524 2,822 8,630 4.8%

2,507 1,738 1,578 2,648 8,471 7.0%

10,630 7,056 6,315 11,056 35,057 8.8%

2,652 1,812 1,569 2,695 8,728 (1.5%)

2,802 1,784 1,432 2,778 8,796 (3.3%)

2,714 1,662 1,416 2,569 8,361 (3.1%)

2,400 1,600 1,250 2,450 7,700 (9.1%)

10,568 6,858 5,667 10,492 33,585 (4.2%)

Total EU 27

199,627 5.8%

198,951 (0.3%)

204,394 2.7%

49,747 0.2%

52,040 2.2%

209,837 2.7%

53,582 (0.7%)

54,954 1.6%

50,447 1.4%

47,700 (8.3%)

206,683 (1.5%)

France Germany Italy Spain UK Other EU 15 Total EU 15

Source: IISI, GFMS-MC

10

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

EUROPEAN STEEL BRIEFING

EU plate over slab import premium ($/tonne)

800 700 600

The sharp drop in slab prices has offset the decline in plate prices, but the high margin means plate prices can drop further

EU flat product imports and exports* (000 tonnes)

2,400

Imports Exports

2,200 2,000 1,800

500

1,600

400

1,400

300

1,200 1,000

200

Imports rose to more than 2m tonnes in September

800

100

600

0 Nov 05 May 06 Nov 06 May 07 Nov 07 May 08 Nov 08 Source: GFMS-MC

Sep Jan May Sep Jan May Sep Jan May Sep 05 06 06 06 07 07 07 08 08 08 Source: Eurofer

sharply. Metallurgical coal is more difficult to call given the

than previously announced with expectations of a 30% in

fragmentation of supply and the large differential between

European flat products. Severstal Lucchini in Italy has idled

current prices and marginal costs, but could easily fall

its blast furnace (making slab). The German producers

more than 40% on an fob basis and more on a cif basis.

are likely to decline by less. Nevertheless, we expect EU production to be down at least 15% in Q4.

This will help EU mills although this may be partially offset by euro weakness against the dollar. However, they may

Central European producers – more exposed to the spot

benefit later in the year in this respect if the dollar resumes

market and consequently with a smaller contract order

its downward trend at that point.

book to fall back on – are likely to have to cut harder with Polish, Romanian and Hungarian strip product output likely

...which could add to the pressure on steel prices

to be down 25-40% from Q3 levels.

Automakers and others will push EU mills to pass on

Southern Europe at lows

these cuts in input costs in their contract negotiations – a

In southern Europe, imports remain in the €400-450/

stance supported by the current position of spot prices that

tonne range. Russian, Chinese and some Turkish material

are largely below last year contract prices. Yet with the

are the primary import sources, although volumes are

consolidated nature of the EU industry, we still believe that

limited. Indian producers are trying to get the top end of

EU mills may be able to get a rollover – witness the recent

prices by supplying more into Northern Europe, but with

ability of tinplate suppliers to get increases in that product

limited interest. Riva now appears to be discounting to

thanks to aggressive capacity reduction.

below those import levels in order to freeze them out. We understand that it is offering at €360/tonne ex-works

Sterling props up coil prices

for HR coil and €440/tonne for CR coil. Large buyers are

In the UK, weaker sterling has helped pick spot prices

testing even lower offers and appear to be getting them

off the bottom, although fundamental demand is weak.

in a somewhat desperate attempt by the producer to

Pricing for immediate deliveries is around €500-520/tonne

maintain sales levels.

ex-works. However, we do not expect additional strength in the short-term, as distributors are likely to hold off

Central Europe below €430/tonne in December

purchasing mill material prior to the year-end to reduce

ArcelorMittal Ostrava was at €480/tonne ex-works for

inventory or supply amongst themselves (see below), while

domestic sales in November, as was ArcelorMittal Poland

economic activity remains weak and concerns on cash

and USS Kosice while Dunaferr was around €460/tonne ex-

balances are uppermost.

works for the local and regional markets. The Ukrainians remain the most competitive, although the weakening

EU mills extend production cuts

of the euro has now pushed them back to around €400/

The Corus group originally announced a 20% cut in Q4

tonne cif. This will bring December prices down to around

output from 5m tonnes to 4m tonnes. It has now extended

€420-430/tonne ex-works for the ArcelorMittal operations

this through Q1 and plans to produce 7m tonnes over the

with others coming in slightly lower. Stock sales from

two quarters compared to its 10m tpy capacity – a 30%

Kremikovtzi of Bulgaria are at or even below €400/tonne.

cut. ArcelorMittal has pushed output down even further

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

11

EUROPEAN STEEL BRIEFING EU steel prices (US $/metric tonne(1))

Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 2003 2004 2005 2006 2007 2008 2009 (1)

ave. ave. ave. ave. ave. ave. ave.

Ferrous scrap (1) 175 160 180 225 260 300 325 300 225 180 160 170 200

yoy % change (46%) (52%) (50%) (42%) (37%) (41%) (41%) (50%) (61%) (67%) (62%) (38%) 14%

Slab import (2) 450 380 380 420 480 500 470 400 350 325 325 340 350

yoy % change (17%) (30%) (32%) (35%) (33%) (43%) (49%) (62%) (69%) (71%) (59%) (43%) (22%)

Plate (3) 875 820 750 775 850 900 900 825 775 750 725 750 750

yoy % change (11%) (15%) (23%) (25%) (32%) (31%) (33%) (41%) (45%) (44%) (42%) (25%) (14%)

HR (3) 600 550 575 625 700 750 750 725 650 600 540 520 550

yoy % change (13%) (19%) (19%) (26%) (23%) (31%) (32%) (37%) (43%) (47%) (50%) (37%) (8%)

CR (3) 680 650 675 725 800 850 850 825 750 700 640 620 650

yoy % change (13%) (17%) (16%) (23%) (21%) (28%) (29%) (33%) (40%) (43%) (46%) (33%) (4%)

HDG (3) 750 725 735 785 875 925 925 900 825 775 715 695 725

yoy % change (11%) (13%) (16%) (23%) (20%) (28%) (29%) (32%) (38%) (40%) (43%) (34%) (3%)

152 235 224 244 313 414 230

55% (5%) 9% 28% 32% (45%)

252 449 408 443 521 770 395

78% (9%) 9% 18% 48% (49%)

400 652 796 692 934 1,167 795

63% 22% (13%) 35% 25% (32%)

318 592 558 597 663 928 635

86% (6%) 7% 11% 40% (32%)

425 691 662 705 777 1,023 735

63% (4%) 7% 10% 32% (28%)

450 722 678 784 855 1,108 807

60% (6%) 16% 9% 30% (27%)

shredded cif average EU mill

(2)

cif major port

(3)

ex-mill

All prices are an average of a range of prices that are present in the market, and exclude grade and finishing extras Source: GFMS-MC

Service centres not buying...

...but inventory adjustment is a finite process

One of the key issues facing European steel mills is that

Of course, this process cannot last forever, but it does

service centres are not buying from mills. Not only are

serve to highlight the extent to which inventory is being

they running down inventory, but they are not replacing.

run down to a greater-than-normal level in a credit-

With credit concerns foremost, they are only taking firm

constrained environment, where the uppermost concern is

orders. For example, if they receive a 20 tonne order, but

avoiding risk. The corollary to this trend is that the wave of

only have fifteen in stock, they would usually supply the

buying from service centres will be quick, probably occur at

15 tonnes and then re-order the 20 tonnes from the mill,

one time, and will push prices back up quickly.

supply the additional 5 tonnes and then keep the 15 tonnes in inventory. Instead, we understand that many distributors

Of course, the question is when this will come and we still

are supplementing their 15 tonnes with 5 tonnes bought

expect this to occur in Q1. Mills will then face the difficulty

in from another service center and then not replacing the

of seeing whether this is sustained or not, and whether to

inventory. In this way, they keep all the cashflow and are

ramp up production as order lead times stretch out. We

willing to pay a little more to source from another stockist

think that it won’t be, with steel demand potentially falling

for a firm order, rather than replace at a lower price but

10-15% next year, but steel mills are likely to bring back

be left with inventory. They are also turning to the inter-

on the current idled capacity with a consequent knock-

stockist market to supply complete orders if they do not

on impact for raw material purchasing, driving prices

have material available – taking a smaller margin but not

higher quickly. When the inventory replenishment cycle is

holding risk.

complete, they will be producing too much and prices will drop back again.

EU forecast prices ($/tonne) 1,600 1,400

Shredded scrap Slab import Plate

EU forecast prices ($/tonne) 1,400

Forecast

1,200

1,200

1,100

1,000

1,000

Forecast

900

800

800

600

700

400

600

200

500 400

0 Nov Mar Jul Nov Mar Jul Nov Mar Jul Nov 06 07 07 07 08 08 08 09 09 09 Source: GFMS-MC

12

HDG C R coil HR coil

1,300

Nov Mar 06 07

Jul Nov Mar 07 07 08

Jul Nov Mar 08 08 09

Jul Nov 09 09

Source: GFMS-MC

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

EUROPEAN STEEL BRIEFING EU plate under pressure The EU market remains two distinct sectors. Those integrated producers that had relatively long lead times supplying the higher-grade API, heat-treat or PVQ market have been protected to some extent, although we question whether they have been subject to cancellations as capital investment projects have themselves been postponed. In our view, it seems likely that they will not be able to hold the premium price level beyond Q1. Prices in the commodity market have already come down. Imports from the CIS, Asia (India and China) and central Europe including Turkey are now being touted for as low as €550-650/tonne. Stomana in Bulgaria for example is offering around €550/tonne delivered into central Europe and the Balkans. The Italian re-rollers and central European producers have been forced to respond with competitive offers as well as cutting output themselves. Regional shipbuilding steel – an intermediate product – is also coming down to around €700/tonne cif central Europe.

What are the options for plate in 2009? With plate consumption closely tied to capital investment in the economy, this particular recession could result in a sharp slowdown in plate demand given the current lack of credit for these projects. Once projects that are currently in the late stages of development are completed, we see a sharp contraction in plate demand. Even the previously buoyant wind tower market is showing signs of weakness. The end of the boom years are in sight. If orders collapse, can EU mills turn to export markets to keep up output? Until recently, the EU was a net exporter of plate, but with limited capacity growth and rising demand, it has emerged as a small net importer. We think that it will struggle to return to the export market with the exception of high-value products. With Icdas of Turkey bringing on 1m tpy of capacity in 2009, one of the growth markets for ArcelorMittal Galati, Stomana of Bulgaria and other central European suppliers will be displaced, pushing them to seek other markets. ArcelorMittal Galati has returned to the US market after the lifting of AD duties – supplying 50,000 tonnes in 2007, and for those with access to the USA, prices are relatively attractive, although as the largest producer in the USA, we find it hard to believe that ArcelorMittal Galati will not be constrained by the marketing plan of its US counterparts.

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

13

ASIAN STEEL BRIEFING

Asian prices ($/tonne) 1,400

Asian prices ($/tonne)

Shredded scrap

1,400

HDG C R coil HR coil

Slab import

1,200

1,200

Plate

1,000

1,000 800

800

600

600

400

400

200

200

0

Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul 03 03 04 04 05 05 06 06 07 07 08 08

Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul 03 03 04 04 05 05 06 06 07 07 08 08

Source: GFMS-MC

Source: GFMS-MC

ASIAN STEEL MARKET BRIEFING

Moreover, producers such as Posco that do not usually venture into the low-priced arena are active given weak

Regional mill pricing touches $500/tonne

demand from re-rollers. Nevertheless, we do believe that

Most SE Asian regional mills are now at or below $500/

we are at close to the pricing bottom. We expect Chinese

tonne cif for HR coil. While purchasing picked up in early

prices to move upwards after Chinese New Year and

November (particularly in Vietnam), the news of the cut in

regional purchasing will resume. The fragmentation of

Chinese export duty (see below) made most buyers expect

supply and the consequent reluctance to cut output does

further falls in Chinese export prices (currently around

indicate that Asian prices will struggle to move upwards

$450-520 tonne fob, with the bottom end mainly boron-

and continue to be vulnerable to over-supply.

added) possible and many are now awaiting further price sources are offering HR coil to the Philippines for around

Chinese government removes some export tariffs

$480-500/tonne cif with CR coil at around $560-580/tonne

As part of the stimulus package, the Chinese government

cif. Regional thin-gauge producers have even dropped

is removing export tariffs on the majority of steel products.

the premium pricing strategy offering 2mm material very

This includes HR coil, HR plate, HDG, tinplate and narrow

competitively with 3mm material in an attempt to generate

strip. The government has not changed the tariff on slab

orders.

exports (still 25%). The changes will take place from

declines before stepping in. For example, Chinese and CIS

December 1st. Chinese export volumes dropped in October and we expect them to drop further through the rest of the year. There

This is an unexpected event. Very simply, it reduces

has been some purchasing of export material, but buyers

the cost of exporting, and we should therefore see a

continue to run down inventory and purchase hand-to-

closer relationship between Chinese domestic prices and

mouth. Supply is being cut, but outside China, other Asian

international prices. They resulted in Chinese export offers

output was slow to respond to the market weakness.

declining in the short term from around $500/tonne fob.

Asian Steel Production & Forecasts (000 tonnes) India Japan South Korea Taiwan China Total Asia YoY % change

2004 32,626 112,717 47,523 19,569 279,038 491,473 15.1%

2005 38,030 112,476 47,711 19,094 351,361 568,672 15.7%

2006 43,472 116,219 48,426 20,201 422,010 650,328 14.4%

Q3 07 13,068 29,908 12,710 5,165 125,547 186,398 12.1%

Q4 07 13,920 30,870 12,957 5,105 125,499 188,351 8.9%

2007 51,511 120,196 51,377 20,594 489,862 733,540 12.8%

Q1 08 14,299 30,836 13,206 5,520 124,276 188,137 8.1%

Q2 08 12,898 31,061 14,300 5,870 137,633 201,762 9.2%

Q3 08 13,911 30,447 14,058 4,665 127,068 190,149 2.0%

Q4 08 13,500 28,500 13,200 4,750 105,000 164,950 (12.4%)

2008 54,608 120,844 54,764 20,805 493,977 744,998 1.6%

Australia New Zealand Total Australasia YoY % change

7,416 883 8,299 (1.1%)

7,777 865 8,642 4.1%

7,880 862 8,742 1.2%

2,013 206 2,219 (0.2%)

1,966 222 2,188 (1.6%)

7,906 845 8,751 0.1%

2,145 203 2,348 10.3%

2,026 213 2,239 1.1%

1,989 192 2,181 (1.7%)

1,925 185 2,110 (3.6%)

8,085 793 8,878 1.5%

Source: IISI, GFMS-MC

14

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

ASIAN STEEL BRIEFING

Year-on-year change in crude output in October 2008 Other C IS C hina NAFTA MENA EU27 Asia 0%

at around $550-600/tonne fob, but there is limited interest from Asia (primarily South Korea) or Europe, despite the lower prices as stock continues to be consumed. Cut plate is even more aggressively priced at around $500/tonne fob or even below, as HR producers seek any sales. HDG

-5%

export prices are also down due to limited domestic demand – they are now as low as $580/tonne fob for 1mm

-10%

material.

-15% -20%

Welded tubular tariffs also removed

-25%

Another relevant issue is the reduction of the 15% export tariff on welded tubular goods. This tariff dramatically

-30%

reduced the exports of Chinese welded pipe over the

-35%

last year (non-OCTG), which in turn hit domestic HR coil Source: IISI, GFMS-MC

demand. Those who had benefitted included overseas pipemakers in the US, Europe and Asia, as they were able

Chinese pricing bounces along the bottom

to garner market share back from Chinese tubular groups.

Chinese domestic HR coil prices are struggling to come

The reverse is now likely to take place, with rising exports

off the bottom, but they have risen to around RMB3,400-

of welded pipe (although they have been hit with AD action

3,500/tonne ($420-430/tonne ex-VAT) – about RMB450/

in the USA – their largest market) improving domestic

tonne off recent lows of RMB3,000/tonne ($375/tonne).

HR coil demand and impacting overseas tubemakers (and

With VAT added and a small logistics cost that was

potentially their domestic HR coil suppliers).

equivalent to around $450-460/tonne fob, and we would expect to see deals at this level for December shipment.

Japanese output finally cut

Assuming domestic prices stay at the same level as now

Despite significant weakness in domestic demand in Q2,

however, export prices may rise to around $500/tonne fob

Japanese steelmakers had been relatively slow to cut

by Q1.

output. Finally however, it appears as if rising inventories and falling orders have had an impact on the major

Despite the fact that the production cuts (detailed last

integrated mills. JFE announced a 1.5m tpy cut over Q4

month) appear to be shrinking inventories, we consider it

and Q1. However, this is just a 10% cut, and given the

unlikely that prices will accelerate upwards until there is an

weakness in Japanese export-oriented production of autos

improvement in demand – more likely in our view to occur

and steel-containing goods, we would argue that this is

after the Chinese New Year. Until then, there will be short-

probably only just bringing back demand into line and will

term fluctuations up and down.

make little indent on inventories.

Plate prices under pressure

With falling export demand for steel as well, the Japanese

Chinese export plate prices have continued to slide –

mills may have to cut further. Nippon Steel has yet to

abetted by the 5% cut in export duty. They are now offered

announce definitive cuts, but has already cut back on

Chinese HR coil exports (000 tonnes) 1,800

Chinese HR coil consumption (yoy % change)

C hinese exports dropped in October and will fall further through Q4

1,600 1,400

50% 40%

1,200

30%

1,000

Inventory built during the first half and then apparent consumption has plunged since August

20%

800

10%

600 400

0%

200

-10%

0 Oct 06

Jan 07

Apr 07

Source: GFMS-MC

Jul 07

Oct 07

Jan 08

Apr 08

Jul 08

Oct 08

-20% Oct 06 Feb 07 Jun 07 Oct 07 Feb 08 Jun 08 Oct 08 Source: GFMS-MC

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

15

ASIAN STEEL BRIEFING long product output, and we believe will have to cut

Re-rollers appear to be liquidating inventory at discount

aggressively over the same period. Japanese orders for

prices. Typically CR coil or HDG made from HR coil that was

steel products fell 10.4% month-on-month in August and

bought in the summer at $1,000/tonne cif is being sold on

more than 5% year-on-year. Since then, the economic

an ex-stock basis for as low as $550/tonne fob – indicating

environment has deteriorated sharply. Inventories of

a 50% reduction from the cost of manufacture, although

strip products (HRC, CRC and HDG) have risen to 4.473m

most re-rollers are in the region of $650/tonne for new

tonnes at distributors and producers at the end of October

orders of CR coil (based on a $500/tonne delivered cost

– around 12% above the comfort level of 4m tonnes

of HR coil). We expect clearance of high-priced stocks to

– after rising for three consecutive months.

remain a factor for the remainder of the year. Re-rollers will then look to take advantage of lower-priced HR coil to

The integrateds will certainly have to cut prices, which are

establish a more “regular” market from Q1 at their current

nominally still at $1,000/tonne ex-works. Even TSM is at

quoted levels, but are unable to do so at present.

around $700/tonne ex-works. The strengthening of the yen has pushed up dollar prices, making imports more

Even Posco is being more aggressive in its export offers

attractive. Top-tier Chinese suppliers are offering $600/

despite lower output levels as Gwangyang remains

tonne cif, and consumers are likely to use this to pull down

down for maintenance/upgrades as domestic re-rollers

domestic pricing, but imports will probably arrive over

dramatically reduce purchases from it given their

the remainder of Q4 as some buyers have already taken

difficulties. We understand that Posco is offering at around

advantage of the price imbalance.

$480-500/tonne fob for HR coil, which is very competitive given the high quality level.

South Korean market undergoes correction Dongkuk stopped production at one its plate mills (1.5m

Taiwanese cut

tpy capacity) for the month of November, highlighting

China Steel of Taiwan cut its Q1 prices for the domestic

high product inventory, while Posco has indicated that it

market to around $625-650/tonne ex-works for HR

may cut CR coil output. Import purchasing (mainly from

coil, but this remains above the price offered by smaller

China and the CIS) has also dropped as dealers work off

producers, which is closer to $525/tonne ex-works, and the

inventory and wait for prices to bottom out. Chinese HR

producer may therefore discount slightly more. However,

coil is nominally offered at around $500-530/tonne cif.

we believe that $600/tonne may be close to its marginal

This is too high for buyers, who are pushing for $470/

cost, so the group may be reluctant to lower prices again.

tonne cif, with some deals completed at that price. Chinese

It cut domestic plate prices to $850/tonne. Chung Hong

plate offers are also being cut in what so far is a vain

is cutting output further as it struggles to find sales – it

hope to pick up sales. Offers have now dropped to below

reportedly expects to operate at only 30% of capacity in

$600/tonne cif for commodity plate. Shipbuilding plate is

December and possibly January. This means that it will not

down to $800/tonne cif and could go lower given the lack

be purchasing any merchant slab and sourcing solely from

of buying.

its joint-venture with Sumitomo in Japan. Asian steel prices (US $/metric tonne(1))

Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 2003 2004 2005 2006 2007 2008 2009

ave. ave. ave. ave. ave. ave. ave.

Ferrous scrap (1)

200 210 220 250 300 350 365 340 300 225 180 180 225

184 286 249 262 347 486 271

yoy % change (45%) (46%) (48%) (40%) (40%) (42%) (48%) (54%) (58%) (61%) (60%) (40%) 13%

Slab import (2)

425 395 400 440 465 480 480 450 400 360 350 350 370

yoy % change (25%) (31%) (37%) (35%) (42%) (45%) (49%) (57%) (64%) (64%) (59%) (36%) (13%)

274

462 55% 69% 397 (13%) (14%) 423 5% 7% 530 32% 25% 775 40% 46% 418 (44%) (46%) (1) shredded cif Korea (2) cif major port ex-CIS (3) cif major port All prices are an average of a range of prices that are present in Source: GFMS-MC

16

700 600 600 650 700 750 750 700 650 550 520 520 550

yoy % change (7%) (25%) (29%) (28%) (29%) (31%) (35%) (42%) (47%) (53%) (50%) (39%) (21%)

375 642 624 503 658 980 639

71% (3%) (19%) 31% 49% (35%)

Plate (3)

520 500 500 550 580 600 620 550 500 475 460 460 500

yoy % change (17%) (26%) (31%) (31%) (36%) (37%) (38%) (50%) (55%) (55%) (48%) (29%) (4%)

338 503 508 494 598 848 530

49% 1% (3%) 21% 42% (38%)

HR

(3)

580 560 560 610 640 660 680 610 560 535 520 520 560

yoy % change (13%) (23%) (25%) (28%) (33%) (34%) (35%) (47%) (51%) (52%) (45%) (27%) (3%)

463 683 635 601 659 899 590

48% (7%) (5%) 10% 36% (34%)

CR

(3)

650 620 600 660 690 710 730 660 610 585 570 570 610

yoy % change (5%) (17%) (22%) (22%) (30%) (32%) (32%) (45%) (49%) (49%) (43%) (27%) (6%)

498 708 694 715 725 943 639

42% (2%) 3% 1% 30% (32%)

HDG

(3)

the market, and exclude grade and finishing extras

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

ASIAN STEEL BRIEFING

Asian forecast prices ($/tonne) Shredded scrap

1,400

Plate

1,000

HDG C R coil HR coil

1,400

Slab import

1,200

Asian forecast prices ($/tonne)

1,200 Forecast

1,000

800

800 600

600

400 200

400

0

200

Forecast Nov Mar Jul Nov Mar Jul Nov Mar Jul Nov 06 07 07 07 08 08 08 09 09 09

Source: GFMS-MC

Nov Mar Jul Nov Mar Jul Nov Mar Jul Nov 06 07 07 07 08 08 08 09 09 09 Source: GFMS-MC

Global Steel raises CRC While holding its HR coil price at around $550/tonne delivered to Manila, the Philippine company is raising its domestic CR coil price to $650/tonne in an attempt to stabilize the market. It is selling medium plate for around $620/tonne on a similar basis. Despite the 7% import duty, imports could undercut this price with Chinese HR coil arriving in January at around $480/tonne cif ($520/ tonne including tariff) and CR coil at around $560/tonne cif ($600/tonne including tariff). We believe that Global Steel may have to reduce prices in order to get business in what is usually a quiet period for demand.

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

17

EMERGING MARKETS STEEL BRIEFING

CIS prices ($/tonne)

CIS prices ($/tonne) 1,400

1,600

Shredded scrap Slab export

1,200

Plate

1,000

HDG C R coil HR coil

1,400 1,200

800

1,000

600

800

400

600

200

400 200

0

Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul 03 03 04 04 05 05 06 06 07 07 08 08

Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul 03 03 04 04 05 05 06 06 07 07 08 08

Source: GFMS-MC

Source: GFMS-MC

EMERGING ECONOMIES STEEL MARKET BRIEFING

its HR coil output by a further 30% in November compared to October. The fact that producers are only producing for firm orders should ensure that their initial response to an

Are prices beginning to bottom out

improvement in the order level will be to raise prices.

As the part of the global supply chain most attuned to a change in purchasing, we would expect emerging steel

With international and domestic buyers expected to avoid

exporters to be the first to see the impact of any re-

the market until the New Year, with the exception of

stocking. While some business was conducted in early

hand-to-mouth buying, we see no major change in the

November, we view this primarily as bargain-hunting, but

price level prior to that point. At some point nevertheless,

it did serve to mark the bottom of the market. From below

purchasing will pick up and our best guess is January or

$400/tonne at the beginning of November, CIS mills have

February for Q2 delivery.

been able to climb up to $420-460/tonne fob Black Sea at the end of the month, but brief efforts to push them even

Ukrainians off the lows

higher were unsuccessful.

After dipping to as low as $360/tonne fob in early November, and sealing a few HR coil deals at those prices,

CIS production is now at very low levels as orders

Ukrainian mills are upping sales levels to around $420/

(domestic and export) have collapsed. Ukraine appears set

tonne fob, and tried to push them even higher in the short

to operate at below 50% of previous levels in November

term. Russian mills did not drop as aggressively and are

and December, with Russia not far behind. MMK has kept

looking for $450/tonne minimum and hoping to get back to

its Mill 2000 idled, while NLMK is running at 60%. Ilyich cut

the $500/tonne fob level shortly.

Emerging Producers Steel Production & Forecasts (000 tonnes) Turkey Other Europe Total Other Europe

2004 20,486 1,963 22,449

2005 20,862 2,448 23,310

2006 23,345 3,975 27,320

Q3 07 6,304 1,061 7,365

Q4 07 6,480 1,014 7,494

2007 25,513 4,602 30,115

Q1 08 6,890 1,307 8,197

Q2 08 7,318 1,318 8,636

Q3 08 7,204 1,163 8,367

Q4 08 5,600 1,100 6,700

2008 27,012 4,888 31,900

Russia Ukraine Other CIS Total CIS

64,289 38,738 8,710 111,737

65,611 38,641 8,106 112,258

70,755 40,899 7,883 119,537

17,605 10,609 2,250 30,464

18,198 10,887 2,162 31,247

72,492 42,596 8,769 123,857

19,206 11,001 1,995 32,202

18,514 11,183 2,150 31,847

18,589 9,370 2,270 30,229

13,500 5,500 1,800 20,800

69,809 37,054 8,215 115,078

Brazil Other Central & S. America Total Central & S. America

32,909 14,272 47,181

31,621 14,934 46,555

30,910 15,844 46,754

8,677 3,811 12,488

8,782 4,199 12,981

33,787 15,789 49,576

8,641 3,956 12,597

8,806 3,960 12,766

9,350 4,224 13,574

9,000 4,000 13,000

35,797 16,140 51,937

Africa

16,564

17,477

17,454

4,735

4,642

18,659

4,614

4,603

4,579

4,550

18,346

Middle East

13,671

14,675

14,772

3,928

4,248

15,726

4,094

4,171

3,845

3,700

15,810

Total emerging

211,602 6.0%

214,275 1.3%

225,837 5.4%

58,980 2.1%

60,612 4.9%

237,933 5.4%

61,704 5.3%

62,023 3.8%

60,594 2.7%

48,750 (19.6%)

233,071 (2.0%)

Source: IISI, GFMS-MC

18

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

EMERGING MARKETS STEEL BRIEFING

Domestic ex-mill Indian prices of HR coil ($/tonne) excluding VAT versus Asian price

Krakatau offering at below $480/tonne cif, but the Chinese remain above $500/tonne cif.

1200 1100

Spot purchasing returns at low levels out of CIS

Despite the 5% import duty, Indian prices will have to fall further in December

1000 900 800

While we would not characterize it as a return to normal levels, sales volumes for CIS coil producers have picked

700

up in the last couple of weeks as traders secure positions

600

for Q1 deliveries, particularly to the Middle East and North

500 400

Indian domestic

Africa. Turkey took 60,000 tonnes of HR coil from Ilyich

Asian regional

and 65,000 tonnes from MMK. With higher availability of

300

HR coil from Isdemir, Turkey is now looking to export rather Nov 06

Mar 07 Jul 07

Nov 07

Mar 08 Jul 08

Nov 08

Indian price is translated to US$ Source: GFMS-MC on a monthly average basis

than import HR coil with a tender for December production recently sold for $470-480/tonne fob. Short lead times and a competitive price of around $450/tonne ex-works mean that any Turkish buyer can source domestically rather than from the CIS for now. Nevertheless, weak international

Freight rates are also dropping, which is assisting fob

demand for Turkish tube and pipe and cutbacks from those

prices. Black Sea to Turkish routes for example are now

producers is dampening demand for HR coil.

down to around $25/tonne from highs of $50/tonne in the summer. Turkish buyers snapped up a couple of very

We estimate that slab prices are around $350-450/tonne

low-priced offers, but have not bought extensively at

fob Black Sea, although there is very little merchant

the new higher quotes and indeed we expect them to be

business, with most exports to captive downstream

rather reluctant to do so given weak domestic and export

processors.

demand. As such, too aggressive an increase will lead to a reluctance to purchase. With Chinese fob prices potentially

The plate export business remains weak, with Ilyich and

moving lower, we see little chance of the prices moving

Azovstal operating at relatively low levels given a poor

above $500/tonne prior to the end of the year.

order book. Limited sales to the Middle East and North Africa are continuing at around $600/tonne fob. They are

There was some business completed at $450-480/tonne

battling low-priced Chinese offers and even rare suppliers

fob for Magnitogorsk HR coil to the UAE – up from the

such as Turkey as mills seek to maintain sales in the face

absolute bottom of just over $400/tonne in October, but

of sharply-lower domestic demand.

further attempts to raise the price over $500/tonne fob have not as yet been successful, and with little sign of a

On the domestic front, the collapse in credit has sharply

buying surge, prices may drift down again. CIS producers

reduced orders from trading houses or distributors that

are also battling Asian imports into the Middle East, with

tend to be the biggest buyers from domestic mills. They

Emerging steel prices (US $/metric tonne(1))

Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09

Ferrous scrap (1) 150 160 200 225 250 300 280 250 200 150 140 160 200

yoy % change (53%) (53%) (47%) (42%) (50%) (47%) (58%) (64%) (71%) (75%) (65%) (36%) 33%

Slab export (2)

395 365 370 410 435 450 450 420 370 330 320 320 340

yoy % change (27%) (32%) (36%) (35%) (46%) (47%) (51%) (58%) (65%) (67%) (57%) (36%) (14%)

Plate (2) 600 600 650 700 725 750 725 650 600 580 560 550 580

yoy % change (15%) (17%) (16%) (15%) (28%) (33%) (37%) (46%) (52%) (52%) (50%) (35%) (3%)

HR (2) 480 450 475 525 600 650 650 600 500 475 425 425 460

yoy % change (20%) (27%) (27%) (33%) (29%) (37%) (40%) (48%) (56%) (53%) (50%) (29%) (4%)

CR (2) 560 530 555 605 680 730 730 680 580 555 505 505 540

yoy % change (14%) (18%) (22%) (28%) (26%) (32%) (37%) (44%) (52%) (50%) (46%) (26%) (4%)

2003 ave. 142 249 305 288 389 2004 ave. 213 50% 430 73% 525 72% 477 66% 564 45% 2005 ave. 216 2% 372 (13%) 521 (1%) 445 (7%) 538 (5%) 2006 ave. 233 8% 412 11% 520 (0%) 491 10% 574 7% 2007 ave. 300 28% 496 20% 664 28% 573 17% 632 10% 2008 ave. 445 48% 723 46% 954 44% 822 43% 890 41% 2009 ave. 216 (52%) 388 (46%) 649 (32%) 533 (35%) 613 (31%) (1) A3 fob Black Sea (2) fob Black Sea (incl. Russian, Kazakh & Ukraine) All prices are an average of a range of prices that are present in the market, and exclude grade and finishing extras Source: GFMS-MC

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

HDG (2) 650 600 650 700 750 800 825 800 750 700 600 575 600

yoy % change (14%) (21%) (17%) (22%) (25%) (33%) (38%) (42%) (46%) (47%) (52%) (23%) (8%)

447 633 640 712 777 1,022 715

42% 1% 11% 9% 32% (30%)

19

EMERGING MARKETS STEEL BRIEFING

CIS forecast prices ($/tonne)

CIS forecast prices ($/tonne)

1,400

1,600

Shredded scrap 1,200

Slab export Plate

1,000

HDG C R coil HR coil

1,400

Forecast

800

1,200

Forecast

1,000

600

800

400

600

200

400

0 Nov Mar Jul Nov Mar Jul Nov Mar Jul Nov 06 07 07 07 08 08 08 09 09 09

200 Nov Mar Jul Nov Mar Jul Nov Mar Jul Nov 06 07 07 07 08 08 08 09 09 09 Source: GFMS-MC

Source: GFMS-MC

have also cut purchasing of intermediate steel products

$500/tonne and $550/tonne respectively, although larger

such as pipe, the producers of which have in turn slashed

deals could get a discount to that. Indian HDG offers have

output, further depressing domestic demand. Domestic

dropped to $700/tonne cif or even below with short lead

prices are now down to $480-550/tonne ex-VAT, ex-works

times. Buyers tend to be sourcing from stock rather than

for HR coil depending on producer. This is around a 25%

completing deals.

cut from November prices. We do not expect any shortterm improvement in domestic sales given that this is

Egyptian cutbacks

typically the very slow season for domestic construction

Kandil has cut output by 60% to 10,000 tpm in November

markets and producer inventories remain a problem.

from its more usual 25,000 tpm. Export sales in particular

Domestic HR plate is down to around $510/tonne for

are under duress, but domestic sales are also struggling

medium plate, with thicker plate (>20mm) around $650/

with high inventory. More fundamentally, Ezz is stopping

tonne ex-works, ex-VAT. Only domestic HDG (0.55mm) has

production at its 1.2m tpy EZDK site, but continues to

retained some strength, with prices held at around $975/

operate its larger ANSDK facility. It is trying to hold

tonne ex-works.

domestic HR coil prices at around $750/tonne ex-works, but is being undercut by imports and domestic competitor

Restrained Middle East purchasing

Hadisolb, and will probably have to adjust downwards.

Local suppliers such as Hadeed have been forced to cut prices again, with Hadeed around $500/tonne ex-works,

India re-imposes 5% import duty

but it is still prevented from accessing the export market

After abolishing this in mid-2008 as domestic prices

due to restrictions imposed earlier in the year, although

soared, it has been re-instated as prices fell. Meanwhile

these could be lifted soon. Even at this price, there are

the 15% export tax on slab was removed. Over the last

few takers as consumers prefer to work through stock.

couple of months, rising imports of Chinese and CIS

Mobarakeh of Iran cut its domestic price to around

material found better prices in India, particularly for HR

$520/tonne ex-works and is also exporting for as low

coil, compared to other Asian destinations. This has led

as $500/tonne fob. This means importers are typically

to declining orders for domestic producers of coil, with

offering at around $460-480/tonne cif Caspian ports from

SAIL for example seeing orders fall 15% from September

ArcelorMittal Temirtau and Magnitogorsk.

to October, forcing it to consider cutting output as well as dropping prices.

Imports into Syria and Lebanon are at low levels. High stock levels ensure that traders are reluctant to purchase

Domestic November HR coil prices have dropped to around

material. Some material was bought from Ukraine when

Rs31,000/tonne ($600/tonne), so given import pricing of

prices touched lows and deals were made at below $400/

below $500/tonne cif in the last few weeks from CIS and

tonne cif, but buyers have backed off as prices rose again.

China, it is unsurprising that its order level dropped. The

Trading is also limited due to the reluctance of banks to

5% import duty would then only give a landed price of

open L/Cs.

around $525/tonne cif, indicating that domestic producers will have to cut prices again in December, and cut volumes

In the UAE, import offers continue to decline with CIS

to bring the market into balance. Indian output barely

suppliers the lowest priced for HR coil and CR coil at

moved in October, and we believe inventories have

20

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

EMERGING MARKETS STEEL BRIEFING probably been built at producers and consumers. However, Indian producers remain reluctant to cut, with Tata indicating that it is not planning any reductions in output, while JSW expects to operate at higher rates in December, after cutting output by around 15% in November. With JSW having a structural surplus of up to 600,000 tpy of slab, the relief on the slab export duty is particularly beneficial and we expect to see more offers from this source going into Q1. The relatively high domestic price is also discouraging exports, which although quoted below domestics at $550/ tonne fob are largely being frozen out of international markets as being too high.

Latin America back on the export front After steadily reducing exports for most of the year, Brazilian and some other Latin American producers are seeking to export in Q4 – in part to hold up prices in their own domestic markets as demand is slowing. Nevertheless, prices are not hugely competitive at around $560/tonne fob for HR coil out of Brazil and $620/tonne for CR coil. CIS suppliers are probably cheaper for shipments to regional markets, but lead times may be slightly longer. We believe the main target is the USA, where local prices remain slightly elevated, and $600/tonne cif Gulf port is a significant discount to domestic prices.

GFMS METALS CONSULTING M E TA L S C O N S U LT I N G

21

METALS CONSULTING

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