steel market futures briefing

STEEL MARKET FUTURES BRIEFING Analysis of the global long product and raw materials markets incl. rebar, wire rod, billet, scrap, HBI & DRI North America , Europe , Asia , Emerging Markets STEEL MARKET FUTURES BRIEFING Table of contents

Arbitrage works its magic Our update of two weeks ago noted that there was an unsustainable price

Page. 1

Executive Overview

Page. 5

North American Markets -

Page. 9

differential between global long product prices. That is now shrinking quickly, with prices in Gulf markets down by $50/tonne, while prices at the bottom also rose in the USA and South Korea. The overall net effect was a

Nafta countries

small increase in finished product prices, while scrap and billet prices fell. Despite the shrinkage, we believe that this trend still has further to go in

European Markets -

Page. 13

the short term. Plentiful Asian supplies of long products are going to the

EU-25 countries

Middle East, Latin America and SE Asia, which are bringing down Turkish and, to a lesser extent, CIS prices. Weak demand in Europe and North

Asian Markets -

America is fuelling rising exports.

China, Japan, South Korea, Taiwan & ASEAN

Nevertheless, the correction will be marginal through August. We expect

countries

Page. 17

prices to roll-over in North America, and decline slightly in Europe, Asia and emerging economies. However, we are not yet convinced that this is the

Emerging Markets -

July, 2008

end of the upturn. We are seeing seasonal slowdowns in demand in Asia

CIS, Middle-East, South

and the Middle East. The slowdown in southern Europe is structural and

America & South Asia

there will be no bounceback, and this could spread to northern continental Europe as well. There remains a viable fear that US demand could sharply weaken in the second half, but that may not have a huge impact on global

Global* long product prices

prices. As is often the case, we come back to China.

Ferrous scrap

Billet

Rebar

Wire rod

669

1,175

1,211

1,206

month-on-month % change

(0.9%)

(1.7%)

1.6%

2.2%

year-on-year % change

114.0%

129.5%

104.1%

102.2%

July 2008

month-on-month % change year-on-year % change

hits the south and much of the rest of the country will be bathed in high temperatures which reduces construction activity. It may also reduce the availability of coal (and consequently coke) as it is diverted to the power sector, which could push up prices further and result in slowing steel

Global* long product price forecast

August 2008

Domestic demand will be weak over the next six weeks as rainy weather

output. This may therefore balance out.

Ferrous scrap

Billet

Rebar

Wire rod

680

1,188

1,204

1,203

Our analysis suggests that, assuming raw material prices stay the same,

1.7%

1.1%

(0.6%)

(0.3%)

Chinese export prices could fall a further $100/tonne before there will be

111.7%

132.8%

107.2%

103.3%

*This is an average of all relevant regional prices Source: GFMS-MC

a supply response. Domestic sales are now only marginally profitable for smaller, non-integrated mills that have the highest cost. Any significant fall in domestic prices would push down output and bring the market back into balance. The key factor will be what happens in September. We expect that construction will re-start around Beijing and the country continue to grow at similar levels to the first half – around 6-8% year-to-date for wire

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, Peter Roberts

rod and rebar as rapidly declining exports have seen output remain flat. In addition, we would not be hugely surprised for the loophole of alloy

Disclaimer: Whilst every effort has been made to ensure the accuracy of the information used in this document, GFMS Metals Consulting Ltd cannot guarantee such accuracy and GFMS Metals Consulting Ltd does not accept responsibility for any losses or damages arising directly, or indirectly, from the use of this document.

STEEL MARKET FUTURES BRIEFING

Global rebar pricing 10th July ($/tonne) 1,700

1,700

1,570 1,450 1,395 1,260 1,300 1,240 1,100 1,080

1,500 1,300 1,100

Global rebar pricing 25th July ($/tonne)

1,500 1,300 1,100

975

700 650

700

500

500

1,000

690

Ch in a Ko do m re e a do stic m US e do stic Ch m in est a i ex c It al po r y ex t p C Tu o I rk S e rt i x s G er h d por o t m an me s do ti c Br m az es t D ub il e ic xp ai do ort m es ti c

900

Ch in a Ko do m re e a do stic m US es do ti c Ch m in est a i ex c It p al or y ex t po Tu CI rk S e rt is x G h p er do or t m m an es ti c do Br m az es t D ub il e ic xp ai do ort m es ti c

900

1,150 1,025

1,520 1,400 1,350 1,225 1,250 1,200

exports to be removed. Both factors will push up domestic

excessively bearish. Chinese billet prices have dropped to

and export prices for long products. Only a fundamental

$1,050/tonne fob with other Asian suppliers at $1,100/

downturn in demand, which would be accompanied by

tonne or so. The LME is indicating that prices could fall a

decelerating iron ore and coal prices, would result in

further $200/tonne. We think that this is excessive. Our

further weakness for the rest of the year, and as yet, we

analysis suggests that there will be a supply response

see no sign of that.

when Chinese fob prices go below $950/tonne fob (other Asian suppliers at around $1,000/tonne fob). The removal

FUTURES BRIEFING

of Chinese supply at below that price would probably then push up physical market prices.

Price correction is excessive in our view LME 3-month prices have been falling for the last two

The fall in the Mediterranean contract is also opening up a

weeks on market pessimism on the future direction of

wide gap between Dubai billet and rebar on the DGCX. It

prices. They now stand at $900/tonne for Asian and at

is trading in a relatively narrow margin of around $1,500-

$1,040/tonne for Mediterranean deliveries.

1,550 – a nearly $400/tonne margin over the LME billet price. We view this as unsustainable, and would argue that

As we noted in our previous update, we thought the

LME billet is too low.

bearish tone of LME forward prices earlier in the month was correct despite the physical market strength. However,

In particular, we consider that Turkish mills have yet to

we now feel that the LME forward prices have become

come back to the market to secure scrap for September

US Non-residential construction expenditure is slowing, but remains high in year-on-year terms

Year-on-year % change in fixed asset investment in China 32 Fixed asset investment is being sustained at high levels

31

25%

30

20%

29 28

15%

27 26

10%

25

5%

24 23

0% May Aug Nov 06 06 06

Feb 07

May Aug Nov 07 07 07

Source: US DoC , GFMS-MC

2

Feb 08

May 08

22 Jun 06

Dec 06

Jun 07

Dec 07

Jun 08

Source: Economy.com, GFMS-MC

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

STEEL MARKET FUTURES BRIEFING

1,325

Japan continues to see weakness

LME 3-month billet prices ($/tonne)

Japanese housing starts recorded their 11th consecutive decline – down 6.5% year-on-year in May. We see no short-term improvement here and we expect to see

1,225 1,125 1,025

LME billet forward prices indicate market weakness

continued availability of Japanese long product exports as a result.

US non-residential holds up well Non-residential construction expenditure in the USA continues to hold up better than expected. May numbers

925

Far East Mediterranean

825

were up month-on-month and remain more than 10% above year-ago levels. In terms of sectoral numbers, construction was strongest in lodging, manufacturing, education, power and office construction. This shows that

725 Feb 08

Mar 08

May 08

Jun 08

Jul 08

Source: LME

the late cycle capital investment is still flowing through to actual construction expenditure despite the recent credit woes and the weakening economy. Nevertheless, we continue to expect weakness in these numbers going

delivery and when they do, scrap prices could rise again.

forward. The question becomes whether they will hold out

This could leave LME billet prices looking low and Turkish

for the rest of the year, or the declines will come earlier.

offers more in line with what the physical market will take.

CONSTRUCTION BRIEFING Chinese Olympics and sentiment On a positive note for steel consumption in China, fixed asset investment over the year-to-date rose 26.8% in June compared to 25.6% in May. These ongoing numbers show resilience in the face of slowing overseas markets and going into the Olympics, which is likely to result in some volatility in the numbers in Q3. Residential property prices rose strongly during the first half of the year, but there has been some weakness in some of the bigger urban markets in the last few months, which has resulted in potential concerns over residential mortgages. Our key concern remains inflation and what the Chinese authorities will do as a policy response to its rising threat. We are aware that there is unlikely to be any policy response until the Olympics are finished, but there is increased nervousness that this could signal a sharp tightening. For several years, there has been almost a consensus that Chinese growth would stay strong until this pivotal event. Now that it is here, there is a definite change in sentiment that the end of the Olympics could be a trigger for the end of the Chinese boom. We are more sanguine than this, with our view that the economy has considerable momentum, and that disruptions to economic activity will not be extended. Nevertheless, it is possible that there could be changes in policy after the event that could result in slowing investment expenditure with a knock-on impact on steel consumption growth.

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

3

STEEL MARKET FUTURES BRIEFING Construction Economics Nov-07

NAFTA

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

US housing starts (million units) Year-to-date % change Y-o-Y % change US residential ($bn)

1.178

1.000

1.064

-24.4% -24.7%

-25.5% -38.6%

-24.2% -24.2%

35.9

30.6

27.3

27.2

30.7

31.8

34.0

Year-to-date % change

-18.9%

-19.4%

-26.6%

-26.0%

-26.9%

-27.0%

-27.0%

Y-o-Y % change

-24.3%

-26.2%

-26.6%

-25.4%

-28.6%

-27.1%

-27.0%

US non-residential ($bn)

57.5

52.2

48.4

49.2

52.6

56.3

59.3

Year-to-date % change

16.4%

16.4%

15.8%

16.4%

15.9%

15.6%

14.5%

Y-o-Y % change

20.3%

16.7%

15.8%

17.0%

15.0%

14.6%

10.8%

Canada housing starts (000 units)

230.3

184.7

216.0

243.8

243.0

221.3

227.7

217.8

Year-to-date % change Y-o-Y % change

0.7% 0.1%

-0.7% -16.1%

-16.6% -16.6%

-0.1% 21.1%

3.7% 11.7%

2.9% 0.4%

1.5% -3.8%

0.7% -3.5%

1.107

-24.9% -25.6%

0.988

1.004

0.977

1.066

-27.9% -33.7%

-29.3% -33.3%

-30.2% -33.7%

-29.7% -27.4%

Mexico - gross capital fixed formation (index)

134.5

134.9

135.3

135.9

136.6

137.2

Year-to-date % change Y-o-Y % change

5.3% 3.9%

5.2% 3.8%

3.8% 3.8%

3.7% 3.7%

3.7% 3.7%

3.7% 3.6%

Europe Eurozone - gross capital fixed formation (EUR mil)

(1)

Y-o-Y % change

517,176

476,099

6.0%

5.0%

Germany new orders construction (index)

60.3

68.4

65.4

61.9

80.4

87.2

73.0

Year-to-date % change Y-o-Y % change

6.0% -4.4%

5.6% 0.7%

18.1% 18.1%

11.8% 5.8%

3.8% -6.7%

7.0% 15.5%

3.6% -8.3%

Spain - total housing starts (units)

37,393

50,268

39,796

37,899

30,580

Year-to-date % change Y-o-Y % change

-17.8% -37.9%

-19.0% -30.1%

-20.4% -37.2%

-21.1% -31.4%

-22.1% -39.5%

Italy - residential survey (index - %)

16.9

20.2

15.3

19.6

26.5

22.6

22.6

22.4

Year-to-date % change Y-o-Y % change

-10.8% 4.3%

-8.6% 14.1%

10.9% 10.9%

16.3% 21.0%

35.5% 73.2%

44.8% 78.0%

50.8% 78.0%

59.1% 115.4%

Italy - non-residential survey (index - %)

12.5

14.8

10.3

15.2

18.3

15.2

18.4

18.6

Year-to-date % change Y-o-Y % change

-31.6% -25.6%

-28.2% 54.2%

94.3% 94.3%

9.0% -16.0%

10.9% 13.7%

12.2% 16.0%

15.2% 26.0%

15.9% 19.2%

France - housing starts (units)

30,758

31,241

27,564

26,890

29,330

18,031

30,072

Year-to-date % change Y-o-Y % change

0.5% -15.1%

1.2% 10.3%

-7.6% -7.6%

-7.5% -7.4%

-11.5% -18.1%

-16.2% -32.7%

-16.3% -16.6%

Asia Japan - housing starts (units)

84,252

87,214

86,971

82,962

83,991

97,930

90,804

Year-to-date % change Y-o-Y % change

-17.7% -27.0%

-17.8% -19.2%

-5.7% -5.7%

-5.4% -5.0%

-9.0% -15.6%

-8.9% -8.7%

-8.4% -6.5%

China - residential under construction (sq metres - mil)

2,056,682

2,261,429

1,055,044

1,381,983

1,597,516

1,764,780

Year-to-date % change Y-o-Y % change

21.4% 22.2%

21.3% 21.0%

31.8% 31.8%

28.7% 26.4%

27.7% 26.1%

26.8% 24.8%

China - fixed asset expenditure (CNY bn)

4,553,408

5,227,628

351,765

799,278

1,248,550

1,774,441

Year-to-date % change Y-o-Y % change

16.7% 17.3%

16.9% 17.9%

23.1% 23.1%

22.7% 22.6%

22.4% 22.2%

22.2% 21.9%

South Korea - new order construction (KRW)

3,694,463

5,304,314

1,618,993

1,894,391

3,306,386

1,714,862

2,473,701

Year-to-date % change Y-o-Y % change

34.1% 32.1%

34.2% 34.6%

3.6% 3.6%

3.6% 3.5%

20.0% 44.3%

14.2% -4.1%

21.1% 52.6%

Taiwan - total building permits

10,665

8,069

8,314

4,992

5,252

7,123

7,426

Year-to-date % change Y-o-Y % change

-9.4% -5.6%

-9.2% -6.6%

-2.8% -2.8%

-13.7% -27.2%

-20.3% -33.2%

-21.6% -24.8%

-26.3% -39.1%

Emerging Brazil - fixed asset investment (index)

(2)

Y-o-Y % change

142.8

139.1

8.6%

6.5%

Russia - total dwelling area commenced (m2 millions)

5.9

16.4

3.2

2.6

4.4

3.0

2.9

5.7

Year-to-date % change Y-o-Y % change

29.4% 28.3%

19.4% -1.2%

6.7% 6.7%

5.5% 4.0%

7.4% 10.0%

6.0% 1.7%

5.6% 3.6%

2.6% -5.0%

Source: Ecowin, OECD & GFMS-MC Notes: (1) Eurozone - gross capital fixed formation, (2) Brazil - fixed asset investment: all show quarterly data

4

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

NORTH AMERICAN MARKET STEEL FUTURES BRIEFING

1,400

US scrap and long product prices ($/tonne)

1,200 1,000

1,450

Ferrous scrap

US domestic vs import rod ($/tonne)

1,250

Domestic rebar

Domestic rod

Domestic wire rod

1,050 Imported rod

800 850

600 650

400

450

200 0 Jan Aug Mar Oct May Dec 03 03 04 04 05 05 Source: GFMS-MC

250

Jul Feb Sep Apr 06 07 07 08

NORTH AMERICAN STEEL MARKET BRIEFING

Jan Aug Mar Oct May Dec 03 03 04 04 05 05 Source: GFMS-MC

Jul 06

Feb Sep Apr 07 07 08

As if the market was not tight enough, there have been short-term disruptions to supply with Beaumont (Gerdau) down for a couple of weeks in June, and ArcelorMittal

Wire rod up by another $60/ton

also lost production at Georgetown. These follow earlier

ArcelorMittal continues to be the US price leader in wire

production problems at Ivaco in Canada.

rod. It raised prices by $60/ton for August deliveries (which were already sold out) taking prices to $1,140/ton

Pricing extras enforced

($1,260/tonne) for low carbon and $1,200/ton ($1,320/

ArcelorMittal also added pricing extras this month for

tonne) for high carbon. Other mills followed and this was

small diameter rod (5.5mm or 7/32”) by an extra $20/ton.

“accepted” by buyers, who have no choice on alternatives.

5.5mm wire rod is the most popular import size and given the lack of imports, it has been receiving more orders

With the exception of Chinese boron wire rod, this market

for this product. Given the line runs at the same speed,

remains firmly closed to imports. Chinese boron wire rod

irrespective of the diameter, smaller diameter runs means

was around $1,220-1,250/tonne cif, but has dropped

lower tonnage (and a higher per tonne cost). The result

around $70/tonne going into mid-July, and could go slightly

is that smaller diameters are often more expensive to

lower as fob prices are now close to $1,000/tonne, and

make, although this has not been enforced at all times in

freight rates are coming off highs.

North America. As in all tight markets, producers will look to ensure extras are fully priced – we would expect the

However, traders are only offering new sales on condition

extra will be conveniently forgotten when markets become

that any increase in the tariff be shared. Boron wire rod

better-supplied. In the short-term however, we would

avoids the 15% Chinese export tariff as it is classified as

expect others to follow suit.

alloy wire rod rather than carbon. Paying half of the tariff increase would be around $70-80/tonne and that would

Supply-demand revisions

bring the price back up to domestic levels of low-carbon,

We continue to refine our wire rod market supply-demand

for what is generally perceived as a less cost-effective

balance, which as we have noted in the past is confused

material. Nevertheless, traders suggest that they have

largely by the lack of reporting by some suppliers to the

had significant take-up of this material with large volumes

AISI. It is also made more complex by some mills reporting

expected to land in July and August. If the export tax is

shipments of wire rod to the AISI, rather than production,

imposed, Chinese import offer prices would rise again

as the majority of wire rod producers also consume some

(equivalent to close to $1,180/tonne fob), resulting in

internally in wire drawing operations.

further upward pressure to US prices. It is our view that the Chinese government will close this loophole (that would

In our US supply-demand table, we have added another

be consistent with its previous actions), but when it will

line highlighting internal shipments of reporting mills. This

do so is open to question. Our best guess would be sooner

brings US production up to an estimated 4.8m tons in

rather than later.

2008. Given higher operating rates seen in Q1 in terms of AISI shipments, the potential for mills to increase output from existing operations, as well as planned higher output GFMS METALS CONSULTING

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

5

NORTH AMERICAN MARKET STEEL FUTURES BRIEFING

Comparison of rod and rebar margins over scrap ($/tonne)

650

600

US rebar to scrap margin ($/tonne)

600 500

550 500

400

450 400

300

350 200

300 250

Rebar to scrap margin

200

Rod to scrap margin

100

150 Jul 03

Jan 04

Jul 04

Jan 05

Jul 05

Jan 06

Jul 06

Jan 07

Jul 07

Jan 08

0

Jul 08

Jul Jan Jul Jan 03 04 04 05 Source: GFMS-MC

Source: GFMS-MC

Jul 05

Jan Jul 06 06

Jan 07

Jul 07

Jan 08

Jul 08

at non-reporting mills such as Charter, we expect output

$60/ton increase next month could facilitate imports from

to come in at well over 5m tonnes for the year as a whole

these sources. ArcelorMittal is very globally aware of

– possibly as much as 5.2-5.4m tons, offsetting some of

pricing trends and will probably be anxious to avoid that,

the reduction in imports. Even if imports came to 1-1.2m

and despite the relatively low proportion of wire rod that it

tons in 2008 – in line with Q1 numbers – that would be in

supplies to the domestic market, it is viewed as a price-

line with flat to a small increase in overall consumption in

setter in this market. Furthermore, it appears as if scrap

2008, which is reasonably in line with our expectations.

may finally weaken slightly.

The record high margins for rod over scrap – see chart above – will certainly encourage producers to maximize

In addition, buyers may breathe easier once their

output levels.

Chinese orders have landed, but are unlikely to not take up their previous orders. With the US wire industry still

August pricing may pause

essentially on allocation, buyers are unlikely to forego

The outlook for next month pricing (September deliveries)

taking deliveries in the short term, because that may land

is not yet clear, as US mills have now cleared their discount

them in difficulties later on if they need material. For now

to international levels. With Spanish and Italian wire rod

therefore, most buyers are likely to take their orders at

at €800/tonne fob – equivalent to $1,240/tonne, a further

whatever price the mills set. Given that lead times remain

North American long steel statistics

USA*

2006 7,419 2,587 301 9,705

2007 8,028 1,861 335 9,554

Q1 07 2,026 565 88 2,503

Q2 07 1,905 579 84 2,400

Q3 07 2,043 534 80 2,497

Q4 07 2,054 183 80 2,157

Q1 08 2,092 368 120 2,220

Wire rod Shipments from AISI 1,967 Extra production from reported** 220 non-reported production** 2,260 Total production 4,447 Imports 3,046 Exports 151 Consumption 7,342

2,031 255 2,543 4,829 1,538 104 6,263

498 64 624 1,186 464 26 1,624

503 64 630 1,196 474 28 1,642

488 64 611 1,163 377 24 1,516

542 64 679 1,285 224 26 1,482

680 70 700 1,450 263 40 1,674

Rebar

Canada* Rebar

Shipments Imports Exports Consumption

Output Exports

472 36

500 13

105 7

142 6

109 0

131 0

161 0

Wire rod Output Exports

644 413

785 473

194 117

193 114

179 105

218 137

205 127

Sources: AISI, Statcan, GFMS-MC *Note: US data is in short tons, Canadian data is in metric tonnes **AISI does not report all US wire rod production - this is our estimate - see April 2008 report for analysis

6

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

NORTH AMERICAN MARKET STEEL FUTURES BRIEFING US long product prices ($/tonne)

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

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

Ferrous scrap (1) 645 640 580 620 640 600 640 700 740 750 720 680 650

yoy % change 122% 106% 78% 94% 110% 76% 62% 82% 85% 36% 25% 17% 1%

Rebar import (2) 1,425 1,425 1,460 1,500 1,550 1,500 1,550 1,600 1,650 1,650 1,500 1,450 1,400

yoy % change 125% 135% 141% 157% 165% 154% 118% 100% 59% 50% 20% 7% (2%)

Rebar domestic (3) 1,145 1,145 1,100 1,150 1,220 1,220 1,300 1,350 1,425 1,450 1,450 1,400 1,350

yoy % change 64% 79% 72% 80% 92% 92% 89% 80% 77% 47% 39% 30% 18%

Wire rod import (2) 1,240 1,240 1,220 1,250 1,300 1,250 1,300 1,350 1,400 1,400 1,400 1,400 1,360

yoy % change 81% 87% 84% 89% 92% 83% 79% 54% 33% 25% 21% 19% 10%

Wire rod domestic (3) 1,260 1,260 1,250 1,300 1,350 1,350 1,350 1,400 1,450 1,450 1,450 1,400 1,350

yoy % change 91% 91% 102% 100% 108% 101% 88% 81% 76% 38% 27% 18% 7%

138 251 227 244 303 551

81% (9%) 7% 24% 82%

308 515 472 547 621 1,259

67% (8%) 16% 14% 103%

345 507 535 583 662 1027

47% 5% 9% 14% 55%

335 568 511 559 658 1,134

70% (10%) 9% 18% 72%

351 622 640 649 675 1,122

77% 3% 1% 4% 66%

(1)

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

out at least 3 months and mills are announcing prices

other Latin American markets offer the best market for

around 4 weeks ahead of deliveries, buyers are already

US producers given the short lead times and lower freight

largely in a “price-on-delivery” situation rather than “price-

rates as well as the high prices being paid.

on-order”.

Ferrous scrap outlook It is possible therefore that the increase could be smaller

With international markets slipping (notably Turkish),

(perhaps $20-30/ton) or, we increasingly believe, more

export orders have dropped in the last few weeks, and we

likely a rollover. Assuming scrap pushes up input costs in

would expect a smaller buy from export yards this month.

September however, this will be a short-lived respite, and

With obsolete scrap flows reported to be high into most

a change to Chinese regulations would also push prices up.

yards given the high prices, it is possible that August will see a slackening in prices this month. Prime grades on

Rebar upped in line with ferrous scrap

the other hand may still have some further strength as

In our previous update, rebar prices had yet to be

auto production rates fall further, but even here we are

announced, but we forecast a $40-80/ton increase. Nucor

not forecasting any major increase. Mills are largely well-

in fact added $65/ton to its price via an increase in the

covered and may try to induce a small fall in prices. Yet

surcharge, but left its base price unchanged. This takes

road and rail freight availability also remains tight, which

transaction prices to $1,040/ton ($1,145/tonne) on an exworks basis.

Forecast US scrap and long product prices ($/tonne)

1,600 Turkish imports remain around $1,450/tonne cif Gulf port and there are no transactions taking place at this level. Japanese rebar however does remain available at a more competitive price and there have been some deals. Offers are around $1,220/tonne cif Gulf or West Coast port

1,400

Ferrous scrap

1,200

Domestic rebar

1,000

Domestic wire rod

– around $80/tonne above ex-works prices. Significant

800

Japanese imports arrived in April (according to AISI data),

600

which helped push up overall imports sharply in that

400

month.

200 Exports continue to pick up, but again from relatively low levels, hitting 48,000 tons in April from 42,000 tons in March, although April’s number was nearly double that of April 2007. Target markets in the Gulf of Mexico and

Forecast

0 Jul Nov Mar 06 06 07

Jul Nov Mar 08 08 09

Jul 09

Source: GFMS-MC

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

Jul Nov Mar 07 07 08

7

NORTH AMERICAN MARKET STEEL FUTURES BRIEFING will keep delivered to mill prices high. We are not aware of any shutdowns and operating rates remain in the same range that they have been all year.

Rebar rollover too? The flat to negative outlook for ferrous scrap prices in August suggests that rebar mills are likely to, at best, seek to keep transaction prices flat by raising base prices if the scrap surcharge is cut. Mills are unlikely to want to put additional pressure on the market by raising transaction prices, as the market prepares for a potential slowdown in non-residential construction in the second half of the year. At the same time, they will want to enhance margins as much as possible given rising power and freight costs.

8

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

EUROPEAN MARKET STEEL FUTURES BRIEFING

EU long product prices ($/tonne)

1400

1600

Ferrous scrap

1200

1400

Domestic rebar Domestic wire rod

1000

1200

800

1000

600

800

400

600

200

400

0

EU rebar prices ($/tonne) Domestic rebar Import rebar

200 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

EUROPEAN STEEL MARKET BRIEFING

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

relatively low and extended summer shutdowns should leave the market in approximate balance. Assuming

Prices turn

retained strength in global markets in Q4, prices should

There has been an undoubted shift in European long

come back up again.

product pricing in the last couple of weeks. A correction is well under way in southern Europe, with northern Europe

Prices drop in southern Europe

expected to follow and even the most buoyant markets in

Domestic prices in Spain and Italy for finished products

central Europe will be forced to adjust shortly. We expect

and billet have slid in the last two weeks. Weak demand

prices to remain weak through July and at least the first

and a drop in ferrous scrap prices are driving the market.

half of August with price falls varying depending on current

Domestic rebar and wire rod prices are now down to €780-

levels, but down probably a further €20-40/tonne at least.

800/tonne ex-works – a drop of around €10-15/tonne in the last two weeks, while large-volume export deals are

Demand is structurally weak in southern Europe and is

as low as €770-790/tonne fob. Lucchini for example was

seasonally weak in northern Europe, and this could develop

offering at €800/tonne fob ($1,240/tonne) early in the

into structural weakness in the second half of the year.

month and has dropped around €10-15/tonne by mid-

The EU is now a net exporter of long products and this is

month. Turkish material is out of the market, but small

helping to keep the market slightly tighter. Only in central

volumes of Chinese wire rod (containing boron) is available

Europe is demand expected to remain high and improve.

for September delivery at €790/tonne cif. Billet prices have

However, in the 12 new EU members and SE Europe, we

come down to around $1,200/tonne (€775/tonne) cif Italy

have identified over 2.5m tpy of rebar capacity this is

from CIS sources for September delivery.

coming on-stream over 2008-10 to meet that additional Celsa has indicated that it expects rebar consumption in

demand.

Spain to hit 4.8m tonnes in 2008 compared to just less Whether this seasonal slowdown turns into a rout is, as

than 6m tonnes in 2007 – a fall of 20%. This may be

yet, unclear. It will depend in large part on demand in

optimistic given that construction starts are down more

emerging economies. If these continue to absorb Turkish

than 30%, and one of the largest domestic construction

and European exports, then we expect prices to at least

companies has just gone bankrupt.

hold going into September/October, if not increase.

EU is a net exporter We would certainly expect scrap prices to bounce back at

For the last six months, the EU has moved firmly to a

that time as Turkish mills return to the international market

position of net exports. Exports have been rising steadily

to replenish their dwindling stocks. Nevertheless, there

since Q4 last year and are now higher than they have been

could be a depression in margins for European steelmakers

for at least the past 3 years. Imports have plunged, after

as they compete for market share in a dwindling market

soaring in 2007, and are back to more “normal” levels.

and with lead times short, they will be tempted to undercut to complete sales. Nevertheless, inventories remain

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

9

EUROPEAN MARKET STEEL FUTURES BRIEFING

Italian imports (tonnes)

Spanish imports (tonnes) 350,000

250,000

Wire rod

Wire rod Rebar

Rebar

300,000

200,000

250,000

150,000

200,000 150,000

100,000

100,000

50,000

50,000 0 Jan Mar May Jul 07 07 07 07 Source: ISSB, GFMS-MC

Sep Nov 07 07

Jan 08

0

Mar 08

Jan Mar May Jul 07 07 07 07 Source: ISSB, GFMS-MC

Sep Nov 07 07

Jan 08

Mar 08

Imports of rebar and wire rod in Q1 into Spain were

suppliers have also been active at around €840/tonne cif,

down 55% and into Italy were down 38% - see charts

while Kriviy Rih is as low as €810/tonne cif for wire rod.

above. Chinese and other non-EU sources saw the biggest

Turkish suppliers, that have been absent for the last 3-5

downturn in supply. With EU prices now firmly below

months as they have supplied Gulf markets are also likely

international levels, and demand expected to remain low,

to tender for forward sales. We believe that these lower

we would expect that this trend will continue throughout

prices will restrict excessive price growth, and even some

the year.

reductions in August as domestic mills chase market share.

South-East European demand is strong

In Bulgaria, rebar imports are shrinking as Sidenor

Supported by high Turkish import prices and good demand,

Stomana increases output, although it is not yet making

Bulgarian and Romanian prices have risen to premium

8-10mm rebar, which is being supplied by its Greek parent.

levels over Western Europe, although we believe that this

By 2009, we expect Bulgaria to be exporting – either to

cannot be maintained. Mechel Targoviste in Romania for

other SE European markets or to markets such as Algeria,

example went to €910/tonne ex-works for domestic rebar,

where it can take advantage of EU access.

while Balkan prices are also above €900/tonne. The rebar market remains strong on the domestic front, This has attracted some imports from Italian suppliers,

with construction expected to increase 10-15% this year.

which are able to supply for around €840/tonne cif. Polish

Prices are being kept below regional levels in order to

EU long product prices ($/tonne)

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

Ferrous scrap (1) 670 700 720 760 780 740 780 800 840 860 850 820 780

yoy % change 103% 115% 115% 127% 140% 124% 117% 113% 115% 69% 31% 17% 16%

Billet import (2) 1,200 1,300 1,300 1,350 1,400 1,380 1,420 1,450 1,500 1,500 1,450 1,400 1,300

yoy % change 122% 141% 128% 137% 148% 128% 129% 96% 70% 63% 45% 17% 8%

Rebar import (2) 1,380 1,380 1,400 1,450 1,500 1,500 1,540 1,570 1,640 1,620 1,580 1,500 1,400

yoy % change 126% 130% 130% 142% 154% 138% 108% 91% 67% 56% 44% 15% 1%

Rebar domestic (3) 1,300 1,300 1,370 1,430 1,470 1,450 1,500 1,550 1,600 1,580 1,550 1,520 1,440

2003 ave. 152 264 280 346 2004 ave. 235 55% 390 48% 453 62% 476 2005 ave. 224 (5%) 365 (7%) 408 (10%) 441 2006 ave. 244 9% 399 9% 482 18% 551 2007 ave. 313 28% 558 40% 608 26% 646 2008 ave. 613 96% 1,108 99% 1,216 100% 1,180 (1) shredded cif average EU mill (2) cif Southern European port (3) ex-mill All prices are an average of a range of prices that are present in the market, and exclude grade Source: GFMS-MC

10

yoy % change 88% 95% 111% 131% 142% 140% 108% 91% 72% 52% 44% 20% 11%

Wire rod import (2) 1,400 1,400 1,420 1,470 1,520 1,520 1,560 1,590 1,660 1,640 1,600 1,520 1,420

yoy % change 130% 133% 133% 141% 162% 149% 114% 93% 68% 56% 43% 15% 1%

Wire rod domestic (3) 1,280 1,300 1,390 1,450 1,490 1,470 1,520 1,570 1,620 1,600 1,570 1,540 1,460

yoy % change 86% 94% 111% 125% 129% 126% 103% 88% 71% 55% 45% 23% 14%

38% (7%) 25% 17% 83%

288 463 433 476 594 1,230

61% (7%) 10% 25% 107%

338 546 508 527 655 1,190

62% (7%) 4% 24% 82%

and finishing extras

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

EUROPEAN MARKET STEEL FUTURES BRIEFING

EU trade in long products* (000 tonnes)

1,100

Net imports/(exports) EU long products* (000 tonnes)

500 400

1,000 Imports

900

300

Exports

800

Imports

200

700

100

600

0

500

-100

400

-200

300

-300

200

-400

Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr 05 05 05 06 06 06 07 07 07 08 Source: Eurofer, GFMS-MC

*3-month average

Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr 05 05 05 06 06 06 07 07 07 08 Source: Eurofer, GFMS-MC

*3-month average

– Stomana dropped a further planned €15/tonne increase

The scale of Turkish scrap buying will determine August/September prices

in mid-July in order to avoid over-pricing, and may have to

Slow buying from domestic and Turkish mills, as European

cut for the first time if Turkish mills price aggressively for

mills prepare for summer closures and Turkish mills try

September/October deliveries.

to wait out before buying for September is pushing down

avoid bringing in imports at around €875/tonne ex-works

scrap prices in Europe, although typically dealers are only Other Balkan markets in the former Yugoslavia are around

selling small lots. Prices for shredded in continental Europe

€840-860/tonne ex-works for rebar and wire rod.

have dropped to lows of around €430/tonne ($680/tonne) in Spain to around €460/tonne ($725/tonne) in Germany.

Northern Europe has peaked

Larger processors are, in our view, tending to build

German prices for rebar went as high as €900/tonne

inventory in the expectation of higher prices, rather than

ex-works, but came under pressure in the short term.

sell now and push prices down aggressively.

Suppliers from Spain and Italy can arbitrage into this market, while demand from construction companies is

It is our view that the return to large-scale ferrous scrap

slowing. French prices are at a more reasonable €850-870/

buying by Turkish mills shortly will push up scrap prices

tonne, but again construction is weakening and there may

again at some point – thus forcing southern European

be a short-term correction. Scandinavian prices are around

billet and finished products prices higher by September.

€870/tonne ex-works. Wire rod across the region is a more

Turkish mills have sold large volumes forward at high

stable €850/tonne ex-works. We would expect rebar prices

prices and will have to return to bulk buying shortly. Yet

to come back down to this level over the next couple of weeks. Order levels at mills have dropped and there is an incentive to discount for larger export deals, which will undermine pricing.

EU long product prices ($/tonne)

1,800 1,600

Poles still exporting

1,400

Poor demand and high inventory is still depressing Polish

1,200

prices, and mills are active exporters of both billet and rebar. Sales are around €830-840/tonne daf for regional

Ferrous scrap Domestic rebar Domestic wire rod

1,000 800

markets such as Slovakia and Romania.

600 Domestic billet sales for July were completed as low as €720/tonne ex-works, while rebar was close to €800/tonne for sale to the domestic market. Mills are getting slightly higher for August sales, but only to around €820/tonne ex-works. These low prices have meant that imports are largely not a factor in the Polish market as most are looking for at least €850/tonne cif.

400

Forecast

200 0

Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul 06 06 07 07 07 07 08 08 08 08 09 09 09

Source: GFMS-MC

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

11

EUROPEAN MARKET STEEL FUTURES BRIEFING with European domestic demand weak, they will not be able to enhance margins significantly and will continue to export large volumes and reduce import levels. This may lead to less limited increases in billet and finished products compared to scrap going into Q4.

12

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

ASIAN MARKET STEEL FUTURES BRIEFING

1300

SE Asian long product import prices ($/tonne)

1100 900

800

Chinese domestic construction steel prices ($/tonne ex-VAT)

700

Scrap

Rebar

Billet

600

Rebar

700

500

500

400

300

300

100

200

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

ASIAN STEEL MARKET BRIEFING

Wire rod

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

Chinese rebar exports pick up Chinese rebar exports have been running at around

The surge in availability of Chinese billet and long product

100,000 tpm for most of 2008. However in June, offer

exports has finally brought down regional prices and, with

volumes rose sharply and we expect exports to soar in

some lag, is bringing down prices in more distant regions,

Q3, albeit primarily in alloy grades. As with wire rod, the

as arbitrage always does.

majority of rebar offers are alloys, typically with vanadium, but also with boron. With the threshold for qualification

Our analysis suggests that, assuming raw material prices

for boron-added being relatively low, boron additions can

stay the same, Chinese export prices could fall a further

cost as little as $10/tonne more, while benefitting from the

$100/tonne before there will be a supply response.

5% rebate and no tariff. Some mills have even tried to sell

Domestic sales are now only marginally profitable for

the boron rebar as standard material on a cif basis, while

smaller, non-integrated mills that have the highest cost.

claiming the rebate for themselves.

Any significant fall in domestic prices would push down In early July, rebar prices were around $1,060-1,120/

output.

tonne fob with delivery costs of around $100-120/tonne Domestic demand will be weak over the next six weeks as

to Europe and the Middle East, and $30-50/tonne to SE

rainy weather hits the south and much of the rest of the

Asia. Fob prices have largely dropped to around $1,000-

country will be bathed in high temperatures which reduces

1,050/tonne by mid-July due to the weight of offers and

construction activity. It may also reduce the availability of

competitive tendering by mills. Regional demand in SE

coal (and consequently coke) as it is diverted to the power

Asia – the traditional home for most Chinese rebar – is

sector, which could push up prices further and result in

also typically seasonally slower. The exception is Shagang,

slowing steel output. This may therefore balance out.

which is able to supply the Dubai market and is therefore able to command even-higher prices.

The key factor will be what happens in September. We expect that construction will re-start around Beijing and

The reason for the surge in exports was falling demand

the country continue to grow at similar levels to the first

in the domestic market and weakening prices. Domestic

half – around 6-8% year-to-date for wire rod and rebar

prices fell to around RMB5,250/tonne ($650/tonne ex-VAT)

as rapidly declining exports have seen output remain flat.

in the Shanghai market. Adding VAT and the 15% export

In addition, we would not be hugely surprised for the

tariff and getting to port is equivalent to around $900/

loophole of alloy exports to be removed. Both factors will

tonne, so the attractiveness of the export market is clear,

push up domestic and export prices for long products.

with its additional $100/tonne margin. With the Beijing

Only a fundamental downturn in demand, which would

region shutting down construction in anticipation of the

be accompanied by decelerating iron ore and coal prices,

Olympics from July 20th, there is a surge of availability. In

would result in further weakness for the rest of the year,

addition, the rainy season in the south of the country has

and as yet, we see no sign of that.

also stalled construction activity, while the heat elsewhere has slowed other markets.

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

13

ASIAN MARKET STEEL FUTURES BRIEFING

900

Chinese wire rod exports (000 tonnes)

Billet is also available and is selling to predominantly Middle Eastern markets at around $1,100-1,140/tonne, but SE Asian buyers are still reluctant to pay this price

800

given that they can buy rebar fob for less. There have been some discounted sales to SE Asian buyers as low as

700

$1,040/tonne fob. We estimate that the break-even price

600

for billet exports (below which there would be a supply cut)

500

is around $950/tonne fob. This assumes a billet production cost of around $650/tonne ex-works given current coke

400

and iron ore costs.

300 200

As such, there could be a further slide in long product

100

prices over the next month or so, given the relative attractiveness of exports over domestic and the likelihood

0 Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr 06 06 06 07 07 07 07 07 07 08 08 Source; C ISA, GFMS-MC

of sluggish domestic demand for the next six weeks. We would expect to see further falls in billet and finished products to below $1,000/tonne fob.

Wire rod and billet active too

Nevertheless, we have to assume that barring some major

With boron-containing wire rod still available, this remains

policy changes, construction will pick back up in September

the primary export product and stood at around $1,100/

thus improving domestic demand, export demand will

tonne fob in early July, but the higher volume of offers

also improve and there is a strong likelihood that the

available is driving this downward, with the most recent

government will close the loophole on alloy rod and bar. At

price of around $1,000/tonne fob to SE Asian buyers.

that point, prices are likely to move back up.

As with rebar, the domestic price is equivalent to around $900/tonne fob once tariffs are paid, thus making the

South Korean won appreciates

export market more profitable.

South Korean buyers were taking Japanese billet for around $1,100/tonne cif, but this has dropped to around

US and European buyers are being asked for higher price

$1,050/tonne cif – in line with Chinese prices. This is

levels, but this is not sustainable given the increased

still above the price of finished product from EAF mills

volumes available. Chinese mills have even been selling

in South Korea, with Hyundai Steel for example keeping

to more unusual markets with shipments to the CIS for

prices for rebar unchanged during July at Won1,021,000/

example, and have also been active to the Middle East.

tonne, but the appreciation of the won against the dollar has pushed up values to above $1,000/tonne, and it has

Going forward however, buyers are being asked to split the

exited the export market in order to maintain domestic

difference should a tax be imposed between accepting an

supply. Chinese rebar has come into the market over the

offer and delivery. In the short-term this pushes down the

last month for the first time in several months for around

price as buyers discount to offset the added risk. Non-

$1,050/tonne cif, which is attracting some buyers.

boron wire rod is not widely available, but is quoted at around $100-150/tonne more.

Chinese long product market (000 tonnes)

Wire rod

Output Imports Exports Consumption

Rebar

Output Imports Exports Consumption

2006 2007 70,635 80,382 706 614 3,739 5,904 67,601 75,092 11.1% 86,786 101,366 63 50 5,554 6,238 81,295 95,178 17.1%

Feb-08 Mar-08 5,597 7,117 44 45 169 264 5,472 6,898 0.9% 7.5% 6,634 5 103 6,536 7.4%

8,343 3 111 8,234 7.4%

Apr-08 May-08 6,754 7,358 55 42 505 546 6,303 6,854 7.5% 12.5% 8,162 8,512 2 2 109 110 8,054 8,404 1.9% 12.8%

YTD % change 2.4% 3.8% -37.1% 6.2% 0.1% -6.1% -83.0% 8.0%

Source: Various, GFMS-MC

14

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

ASIAN MARKET STEEL FUTURES BRIEFING Asian long product prices ($/tonne)

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

Ferrous scrap (1) 700 680 700 750 770 760 750 800 820 850 820 780 750

yoy % change 109% 100% 92% 100% 111% 95% 76% 78% 55% 39% 17% 8% 7%

Billet yoy % import (2) change 1,120 120% 1,100 114% 1,140 117% 1,250 127% 1,300 136% 1,250 114% 1,270 95% 1,320 78% 1,360 51% 1,420 51% 1,400 43% 1,320 15% 1,220 9%

Rebar yoy % import (2) change 1,140 104% 1,120 95% 1,150 102% 1,300 117% 1,340 123% 1,320 108% 1,320 86% 1,360 66% 1,420 51% 1,470 51% 1,450 42% 1,360 16% 1,250 10%

China rebar domestic (3) 660 680 710 740 750 720 700 750 800 800 825 750 700

yoy % change 58% 52% 54% 60% 44% 32% 36% 41% 33% 20% 20% 11% 6%

Wire rod yoy % import (2) change 1,155 106% 1,135 101% 1,165 103% 1,315 125% 1,355 126% 1,335 110% 1,335 87% 1,375 64% 1,435 51% 1,485 52% 1,465 42% 1,375 16% 1,265 10%

2003 ave. 184 266 280 345 280 2004 ave. 286 55% 395 48% 451 61% 413 20% 461 2005 ave. 249 (13%) 371 (6%) 416 (8%) 378 (8%) 430 2006 ave. 262 5% 393 6% 446 7% 347 (8%) 458 2007 ave. 347 32% 516 31% 572 28% 429 24% 570 2008 ave. 650 87% 1,043 102% 1,084 90% 661 54% 1,097 (1) shredded cif SE Asia (2) cif SE Asia (3) Shanghai market ex-17% VAT 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

64% (7%) 7% 24% 92%

China wire rod domestic (3) 655 675 705 735 745 715 695 745 795 795 820 745 695

yoy % change 55% 54% 53% 60% 55% 36% 33% 31% 30% 20% 21% 11% 6%

353 438 397 372 431 662

24% (9%) (6%) 16% 54%

Other Asian markets slow

of around $1,025/tonne. Netted back, this gives an export

A slowing domestic seasonal market in Taiwan and the ban

(excluding tariff) price of around $955/tonne fob. Volumes

on exports has pushed down domestic prices below import

to date have been small and will come under pressure from

ones. Rebar is around NT$32,000/tonne ($1,050/tonne)

falling Chinese prices and we do not expect this to be a

on an ex-works basis. In Singapore, lower Chinese offers

long-term part of the market.

forced Natsteel to lower prices from around $1,200/tonne ex-works to around $1,150/tonne, but this is still up to

Scrap price falling

$100/tonne over the latest Chinese offers, which have

With buyers showing little interest in deep-sea cargoes,

relatively short lead times, so a further decline is likely.

prices have come down in the last few weeks. A3 scrap from Russian Far East ports to South Korea are now below

Vietnam cashing in on billet exports

$700/tonne cif, while Japanese H2 is around $680/tonne

Despite the imposition of the 10% export tariff on billet,

fob or around $710/tonne cif. South Korean buyers are

some Vietnamese material is being sold, as the domestic

indicating that they would take around $680/tonne cif.

finished market remains weak. Export prices are around

US HMS No1 out of the West Coast is also priced above

$1,050/tonne fob, compared to the domestic rebar price

$700/tonne cif South Korea, and buyers are pushing

SE Asian long product import prices ($/tonne) 1,700

900

1,500

Scrap

800

1,300

Billet

700

1,100

Rebar

Chinese domestic construction steel prices ($/tonne ex-VAT)

Rebar Wire rod

600

900 500

700

400

500 300

Forecast

100

300 200

Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul 06 06 07 07 07 07 08 08 08 08 09 09 09 Source: GFMS-MC

Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul 06 06 07 07 07 07 08 08 08 08 09 09 09 Source: GFMS-MC

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

Forecast

15

ASIAN MARKET STEEL FUTURES BRIEFING back, hoping falling freight rates will push down delivered prices to a more acceptable level. Small volumes of lowerpriced container shipments are being secured, but this is just tiding over buyers. At some point, we believe that buyers will come back and prices will move back up again to previous levels, if not above, but it is unlikely prior to September.

16

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

EMERGING MARKETS STEEL FUTURES BRIEFING

1500

CIS long product export prices ($/tonne fob Black Sea)

1300

Turkish long product export prices ($/tonne fob)

1,600

Ferrous scrap

Billet

1,400

Billet 1100

Rebar 1,200

Rebar

900

1,000

700

800

500

600

300

400

100

200

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

EMERGING ECONOMIES STEEL MARKET BRIEFING

Wire rod

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

here however, there is limited interest, and we expect prices to fall further, with prices coming down to $1,250/ tonne in the short term. With the mills booked out until

Gulf prices peak

September, Turkish mills will continue to push higher for

Transaction prices for Turkish mills selling rebar into

October deliveries, but buyers have yet to commit to

the Gulf have peaked, as mills move to offer October

higher prices, and have switched to alternatives. They

production. Fob prices of $1,525/tonne have been achieved

are being undermined by significantly cheaper Asian

for sales to the UAE ($1,600/tonne cif). Bahraini buyers,

supplies. Chinese billet is offered to the Middle East at

who were sourcing from Saudi, have also agreed to pay

around $1,180/tonne cif, with Indian and Malaysian sales

similar prices now that Saudi exports have been banned.

at $1,200/tonne or below. There have even been some offers of Brazilian material for the first time in an extended

However, the summer heat finally appears to have resulted

period.

in slowing construction demand and along with significant order levels committed, this has allowed buyers to stop

Dual mills switch away from wire rod

purchasing for an extended period. The result has been

Turkish wire rod offers are in the region of $1,400-

falling offer prices. Turkish mills are now back down to

1,450/tonne fob for new sales, but as the vast majority

$1,500/tonne cif.

of producers have the ability to produce either rebar or rod, most are switching to rebar if they can sell it to

Other markets paying much less

the Gulf and wire rod sales are generally of secondary

Smaller Turkish mills or re-rollers that do not supply into

importance at present, so mills are holding to the higher

the Gulf are getting much less. Domestic rebar prices

prices for now, with little need to discount to sell product.

remain around $1,300/tonne ex-works, although may

Italian suppliers are being very aggressive in this product

be pushed up shortly to $1,350/tonne for September

however, so the mills may be forced to adjust in August.

deliveries. Export prices to other markets such as Black Sea destinations in Bulgaria and Romania are around

CIS mills forced to cut billet prices…

$1,350-1,420/tonne fob. Middle Eastern and North African

In late June, CIS billet prices pushed through $1,200/tonne

markets such as Syria are not even paying that price and

fob, but the majority of sales since then have been in the

have shifted to lower-priced CIS or Asian supply. Other

range of $1,160-$1,180/tonne fob Black Sea. Caspian port

markets such as Europe and the USA are simply not buying

prices are typically $10-15/tonne lower. In Far East ports,

any Turkish rebar at all.

the sudden re-emergence of Chinese billet has driven down prices sharply and Russian mills are now offering $1,150/

Turkish mills don’t get billet increase

tonne fob, but even this is attracting little interest, and we

We noted in our previous report that Turkish mills were

expect prices to fall further down to around $1,100/tonne

upping their billet prices and we questioned their ability to

fob in the short term. There is some divergence in the

do so. They have not been able to achieve their targeted

range of offers with large producers holding the line at

prices. Domestic sales have been made at $1,280-1,300/

$1,150/tonne fob (Krivih Rih and Metinvest), while smaller

tonne ex-works with exports at $1,300-1,320/tonne. Even

producers are cutting prices more quickly.

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

17

EMERGING MARKETS STEEL FUTURES BRIEFING

1500 1300

CIS long product export prices ($/tonne fob Black Sea)

1,600

Ferrous scrap

Turkish long product export prices ($/tonne fob)

Billet

1,400

Billet 1100

Rebar 1,200

Rebar

900

1,000

700

800

500

600

300

400

100

200

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

Wire rod

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

…and rebar and rod will follow

In the UAE, ESI is at AED5,770/tonne in July ($1,570/

ArcelorMittal Kriviy Rih is keeping prices at a nominal

tonne). Part of the reason for the high prices being paid

$1,260/tonne fob for rebar and rod, but is beginning to

in the UAE is the withdrawal of Saudi, Qatari and other

discount to $1,230/tonne in order to compete with lower-

Gulf suppliers from the UAE as they focus only on their

priced Asian arrivals into particular markets – Syria for

domestic market. This has enabled Turkish producers

example. Syrian domestic mills have dropped their rebar

to set the marginal price. With most Chinese mills not

price to around $1,250/tonne ex-works. This may become

CARES-certified, there is an inability to source alternatives

more widespread over the next few weeks. Caspian rebar

in significant enough volumes to bring the price down in

is even more competitively-priced as demand in the Kazakh

the short-term.

market plummets just as new capacity arrives, while Iranian demand has been low. Rebar can be found here for as low as $1,200/tonne fob.

Chinese displace Turks and CIS in other ME markets Outside of the GCC, where CARES or other high-standards

Domestic mills have also re-adjusted their prices

are the rule, the inflow of cheap Chinese rebar is pushing

downwards by a small amount. Metinvest for example in

out Turkish supply. Given the volume of sales into the GCC,

the Ukraine cut August sales by $20-40/tonne ex-works

Turkish mills are happy to let this go for now, but CIS mills

depending on product.

will have to respond on price. In Lebanon for example, Chinese rebar is less than $1,300/tonne cif for September

Local private-sector Gulf mills make hay

delivery - $200/tonne below Turkish prices. Syrian local

In Saudi Arabia, Hadeed has kept its prices low – currently

producers have cut prices to below $1,300/tonne ex-works

$1,220/tonne ex-works, and kept them at this price in

and have the market to themselves at that price. With

July. Hadeed is also reportedly buying Turkish and Chinese

most producers indicating that they have good billet stocks

material for distribution through its own warehouse

for a month or two, prices may hold at this level.

operation. ATG and the other private sector mills kept prices at $1,400/tonne ex-works for July sales. Qasco has

Algerian prices soar

raised its export prices to even higher levels – offering

ArcelorMittal Annaba has raised prices to as high as

rebar at $1,580/tonne ex-works for GCC markets, but the

Dinar107,500/tonne ($1,590/tonne) for rebar, which

government may impose an export ban shortly and this

remains in strong demand for near-term deliveries. This

has few takers. In Kuwait, USIC is around $1,600/tonne

could be high enough to even facilitate CIS suppliers that

ex-works for the local market. Uniroll in Bahrain has only

have to pay a 15% import duty. Meanwhile European

just started and consequently Bahraini buyers are taking

mills (that can enter duty-free) are continuing to sell good

Turkish material as their usual Saudi suppliers have

volumes (mainly Spanish and Italian, but also French) at

stopped exporting. Some material was bought for as much

around €870/tonne ($1,350/tonne) cif. We would expect

as $1,600/tonne, but this is now down to below $1,550/

domestic prices to come down over the summer, while EU

tonne.

import prices are also likely to be more competitive.

18

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

EMERGING MARKETS STEEL FUTURES BRIEFING

Turkish billet to rebar margin ($/tonne fob)

250

200

600 500

Either rebar is too high, or billet is too low. We think the former

150

400

Margin between CIS A3 export and Turkish billet export price ($/tonne) Record margin over scrap suggests that either scrap goes up further or billet comes down

300

100 200

50

100 0

0 Jul Jan Jul 04 05 05 Source: GFMS-MC

Jan 06

Jul 06

Jan 07

Jul 07

Jan 08

Jul 08

Jul Jan Jul 04 05 05 Source: GFMS-MC

Jan 06

Jul 06

Jan 07

Jul 07

Jan 08

Jul 08

Egyptian prices increase

Iranian prices forced higher

Ezz Steel, after holding prices flat for two months, has

As we forecast, the ability of the government to hold down

increased its prices for rebar from 1st July. They were

finished prices by selling from stock and setting low prices

raised to E£6,250/tonne ($1,165/tonne), which remains

for state-owned mills was unable to overcome the fact

below an import parity basis. Beshay, which is more reliant

that private sector supply dried up as they are dependent

on imported billet has had to push prices higher to take

on imported billet, and there is insufficient domestic state

into account its higher input costs and is at E£7,250/tonne

capacity to completely supply local rebar demand. In early

($1,355/tonne). With billet prices now peaking and sales

July, the government stopped trying to hold prices down

completed at below $1,200/tonne cif, prices may not go

and consequently they soared. State-owned mills are now

too much higher and with the slowdown in demand over

around $1,420-1,450/tonne. This should allow private-

Ramadan in September, imports are also likely to drift

sector re-rollers to buy billet at around $1,250/tonne cif

away. We expect Ezz to hold prices through August and

and re-sell. It also opens the market for CIS mills to sell

Beshay to come down to around $1,300/tonne.

directly back into Iran. With billet prices now sliding, we would expect a slight downward adjustment in prices over the next few weeks.

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

CIS ferrous yoy % scrap (1) change 660 124% 700 126% 750 131% 720 118% 760 138% 720 112% 720 89% 750 76% 800 67% 840 46% 860 30% 820 17% 760 15%

CIS billet yoy % export (2) change 1,150 136% 1,100 132% 1,150 128% 1,200 141% 1,250 151% 1,300 144% 1,350 116% 1,400 119% 1,450 73% 1,500 67% 1,460 46% 1,350 14% 1,250 9%

CIS & Turkey long product prices ($/tonne) CIS wire CIS rebar yoy % rod export yoy % Turkey billet (2) export (2) change change export (3) 1,220 122% 1230 124% 1,230 1,200 119% 1210 118% 1,250 1,240 125% 1250 124% 1,320 1,300 142% 1310 135% 1,350 1,350 154% 1,360 146% 1,400 1,390 143% 1,400 146% 1,360 1,430 113% 1,440 142% 1,400 1,480 111% 1,490 108% 1,475 1,540 67% 1,550 65% 1,525 1,600 63% 1,610 64% 1,600 1,520 41% 1,530 39% 1,550 1,420 14% 1,430 16% 1,420 1,320 8% 1,330 8% 1,320

2003 ave. 142 227 262 262 248 2004 ave. 213 50% 351 55% 414 58% 431 65% 367 2005 ave. 216 2% 323 (8%) 384 (7%) 399 (8%) 350 2006 ave. 232 8% 356 10% 427 11% 431 8% 403 2007 ave. 306 32% 492 38% 549 28% 548 27% 530 2008 ave. 628 105% 1,028 109% 1,108 102% 1,110 103% 1,123 (1) A3 fob Black Sea (2) fob Black Sea (3) fob Turkey 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

yoy % Turkey rebar change export (3) 141% 1,420 145% 1,380 156% 1,440 162% 1,500 175% 1,540 139% 1,520 112% 1,560 111% 1,640 64% 1,700 63% 1,780 49% 1,680 14% 1,520 7% 1,400 48% (4%) 15% 31% 112%

278 442 411 487 589 1,243

yoy % Turkey wire change rod export (3) 143% 1,430 144% 1,400 155% 1,450 168% 1,510 170% 1,550 130% 1,530 114% 1,570 119% 1,650 73% 1,710 66% 1,790 49% 1,690 5% 1,530 (1%) 1,410 59% (7%) 18% 21% 111%

282 455 418 480 590 1,245

yoy % change 140% 141% 150% 160% 170% 123% 117% 114% 73% 66% 55% 8%

61% (8%) 15% 23% 111%

19

EMERGING MARKETS STEEL FUTURES BRIEFING

1,700 1,500 1,300 1,100

CIS long product export prices ($/tonne fob Black Sea)

2,000

Turkish long product export prices ($/tonne fob)

1,800

Ferrous scrap

1,600

Billet

1,400

Rebar

Billet Rebar Wire rod

1,200 900

1,000

700

800

500 300

600 Forecast

400

Forecast

200

100 Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul 06 06 07 07 07 07 08 08 08 08 09 09 09 Source: GFMS-MC

Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul 06 06 07 07 07 07 08 08 08 08 09 09 09 Source: GFMS-MC

Indian mills hold during July With the major mills having promised to hold prices for 3 months (the last of which is July), state-owned SAIL is selling its rebar for Rs32,000/tonne ($740/tonne) exworks. The smaller private sector mills are considerably higher, and we would expect SAIL to increase prices from August. The monsoon season is typically quiet for consumers and a number of smaller ones are shutting for maintenance. Most private sector mills are selling rebar for Rs42-44,000/tonne ($990-1,040/tonne).

Limited Brazilian exports Focusing almost exclusively on other Latin American destinations, Brazilian exports are some of the highestpriced. Billet is around $1,300/tonne fob, with rebar at $1,450/tonne and wire rod at $1,500/tonne. Under some markets, this is likely to come under pressure from Chinese material that is being actively marketed. However, with shorter lead times and only limited availability, Brazilian material will hold prices high into niche markets.

20

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

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