And later in February, when the contracts were soft-launched on the Exchange’s online trading platform Select and in the inter-office telephone network, it seemed extraordinary that August prices would rise by around $250 from when the contracts were first on offer.

Steel prices in general, and billet and rebar prices in particular, have long been seen to be volatile, but for prices to almost double in less than six months has surprised even those who are reaping the benefit in the form of vastly improved revenues and, most likely, higher profits.

Where this increased volatility has come from is a question on many people’s lips but the answer is neither simple nor straightforward.

China has played a major role in the steel industry, but its absence from the international billet market since the government increased export taxes to 25 per cent has clearly been one of the main triggers behind the latest bull run in this sector.

However, even though China’s absence has left a hole in the market to be filled by producers in other regions, China was never a predominant supplier of billet to the Middle East and Mediterranean region, so it cannot be the only cause for recent price hikes.

The vast majority of billet offered to the merchant market in this region is produced using electric arc furnaces, fed with either scrap or DRI and destined for smaller re-rolling mills in the Middle East, North Africa and southern Europe, mostly producing rebar.

These regions, particularly north Africa and the Middle East, have seen an explosion in construction and infrastructure development over the past few years, fuelled by massive investment in hot spots such as Dubai.

These construction companies have tended to source rebar from a combination of smaller, local producers and a variety of third-country sources, particularly Turkey, which has built up an enormous industry in mini-mills exporting rebar.

Traditionally, the main sources for the billet required to produce this rebar have been producers in CIS countries, particularly Russia and Ukraine.

According to figures provided by the Iron and Steel Statistics Bureau (ISSB), Russia and the Ukraine exported slightly more than 224,000 tonnes of billet to Middle East and north African countries in December last year, nearly 100,000 tonnes of which was dispatched to Saudi Arabia and the United Arab Emirates alone.

By way of comparison Russia and Ukraine exported 103,893 tonnes to the same countries in the Middle East and North Africa during the same period a year earlier.

But the trend has begun to change. Thanks to increasing demand from the domestic CIS construction market, particularly in Russia, export allocations from these producers have begun to thin this year.

Increased investment in crude steel production in the Middle East has and will go some way to make up the shortfall, but demand for finished long products has continued to rise at an astonishing rate.

Buyers have been forced to pay more and more just to secure enough material, and many have been ill-prepared to fight the rises.

While steel prices have almost doubled since the beginning of the year, many consumers’ credit lines have not. They have found themselves able to book smaller and smaller tonnages each month to the extent that many are now living on a hand-to-mouth basis and are unable to build inventory.

Despite these fundamentals, most in the industry would agree that at least a portion of the hikes have been speculative, and very few would be confident placing a number on where the market would find support should there be a correction.

How long current levels can be supported remains to be seen, but with many industry participants nervous about the second half of the year, the launch of the LME’s two steel contracts may be extremely timely.

Phillip Price
Steel eRingsider
Summer 2008