But the extreme volatility seen in billet price movements in two key physical markets this year is probably a new record. From comparatively stable pricing between $500-525/tonne in the second half of 2007, billet prices began a steady move upwards that reached around $750/tonne in late February 2008, a rise of nearly 50 per cent in six months.

The price surge continued into June and July, with another 40-50 per cent increase, peaking at $1,450/tonne fob Turkey and $1,220/tonne fob Black Sea. Since then, however, prices have fallen back dramatically. Depending on region, and in minimal trade, prices were around $800/tonne at the start of September. Although this is a typical annual demand cycle, with construction work picking up with the better weather in the northern hemisphere and only declining in late autumn, the size of the movement is unprecedented.

Demand rose for all steel products at the start of the year and prices of raw materials (iron ore and coking coal for some producers, or scrap for electric arc furnace mills) also increased sharply. Chinese semi-finished products, especially billet, were less available too, as a result of the Chinese government’s policy, which encouraged mills to concentrate exports on higher value products by increasing the tax charges on semis. During the first half of 2008, exports of Chinese billet virtually dried up, pushing demand for product from other suppliers higher. In addition, Turkish mills preferred to export their material in the form of rebar, at even higher prices, which further limited the availability of billets.

So billet (and rebar) prices were driven ever higher even as global economic conditions were deteriorating. The credit crunch (or restrictions on availability of credit or financing) was gaining momentum while mature markets, such as Europe and the US, were heading towards recession.

This appeared less important, at the time, than the voracious demand from the Middle East construction boom, as well as strong Asian appetite for material. However, the seasonal effect of the fierce summer in the Middle East and the rainy season in key parts of Asia coincided as usual. They seem to have had a disproportionate impact on demand this year, and highlighted how fragile consumption was in other markets. Demand in the Middle East is also affected by the timing of Ramadan, which will finish around the end of September.

There are hopes that demand from the construction industry in the Middle East will return in the fourth quarter, and that this will encourage buying activity in Asia. If not, any upturn in Asian demand may be constrained by buyers’ fears of a weak and falling market, in which they will limit their exposure.

Chinese export tax on semis is not expected to come down either in the coming months, and this may well stabilise the market in the near term. There are also suggestions in China that a package of measures to stimulate industrial demand will be introduced as domestic growth has slowed more than anticipated.

In other emerging markets, the underlying construction sector appears to be firm, so demand for long products should return next year. But it is too early to judge whether prices will finish the year stable, or still below current levels. For those producers who have expensive raw materials in hand, or buyers unsure when to restock, this is a critical time. With recent experience of such rapid price fluctuations, it is likely that increasing numbers of market participants will be considering how best to hedge their exposure and manage the price risk in the future.

Mark Wiggett
LME Ringsider enewsletter
Autumn 2008