Further weakness is expected in long products in the fourth quarter, as buyers destock and shy away from purchasing more than they need. Scrap prices may have reached a low, but until there is a clear market for rebar, mills are unlikely to return to the market for significant tonnages. Come early 2009, however, buyers are expected to begin restocking and that will strengthen prices.

The biggest collapse has indeed been in billet and rebar. Since late July, the LME cash Mediterranean billet contract has tumbled from $945-965/tonnes to $554-555/t at the end of September. The Far East cash billet price has fallen somewhat less from $870-875/t to $510-520/t over the same period. Rebar has collapsed from over $1300/t fob Black Sea to around $650-800/t fob, or a little more, at the end of September.

The LME’s billet prices have, on the whole, reflected transactions in the physical market. In fact, falls in the LME’s three-month prices have preceded those seen in the physical market, as expected. Prices in both the Mediterranean and the Far East fell steadily from July to the middle of September, before rebounding marginally over the past couple of weeks. Analysts praised the correlation between prices in the physical market and the LME.

Looking back over the year, the first half was dominated by rapidly rising raw material costs. These were used by some producers to raise prices, particularly in the Middle East. This froth proved unsustainable and helped precipitate further price declines over the summer.

The weakening buying situation was exacerbated by Ramadan and a massive increase in Chinese exports. In August, China’s exports to the UAE/Dubai were about 680,000 tonnes, double the July level. Earlier in the year, exports had been typically around 50 to 150,000 tonnes per month: most are thought to have been rebar. Turkish exports to the UAE in August were an additional 780,000 tonnes.

The steep rise in steel exports to the Middle East came just after the oil price receded in early July. Sentiment in the steel industry reversed at around the same time. Moreover, the second half is seeing weaker demand from the construction sector, a more general rise in Chinese exports and most recently, financial turmoil in some of the world’s more mature economies.

Looking ahead, the Chinese construction sector may well not pick up before mid-2009, though there will be some strengthening in manufacturing from November or December this year. The current weakness in construction is the result of government action aimed at cooling a potentially over-heated sector. Beijing’s more recent pro-growth economic policy should feed through into new construction by late Q2 next year. As a result, rebar exports are expected to remain at quite high levels, unless the government raises export taxes again.

In other emerging markets, the demand for steel for construction should remain reasonably firm, unless the financial turmoil extends widely into Asia, Africa, Eastern Europe and Latin America (there are some suggestions that middle-income emerging markets may be quite heavily hit). Meanwhile, with steel prices falling, iron ore and coking coal producers may also find it hard to raise their 2009 prices; more likely, they will look for stability while buyers will look for reductions.

In the mature economies, prices for rebar and billet are likely to recover in early 2009, in line with the normal seasonal cycle where construction activity recommences in spring as the weather improves. Prices in the US will continue to be weak for the rest of 2008, in line with reduced demand. European demand also appears likely to be low for the remainder of the year, and prices are going to come under pressure from excess production and an increase in the volume of imported material. 

Scrap import prices soared from $420-480/tonne cfr East Asia in January this year to $730-760/tonne cfr in June, and are now back more or less to early 2008 levels. Turkish import scrap has similarly buckled from $720-725/tonne cfr in June to under $400/tonne cfr in September. Some reports say they will further decline to $330/tonne cfr during October, before lifting. There are some signs of higher prices in Japan, but elsewhere the market is soft.

Just as rising raw material costs contributed to the price surge, the current high prices of input materials will probably ensure that there are floor levels for billet and rebar prices, below which producers will not sell. Although different for every producer, it is likely that mills will cut back production rather than sell material below their calculated floor prices. This will eventually strengthen the market and should ensure that there is no return to the far lower price levels of five years ago.

Roger Manser
LME Ringsider enewsletter
Autumn 2008