A bullish start for the LME steel futures contract
London, Mar 17 2008
Formal trading on the LME will start on April 28, 2008, following a soft launch on February 25.
The first delivery date will be 28 July 2008. Prices on the LME (billet) and the Dubai Gold & Commodities Exchange (rebar) have moved up sharply in recent weeks, essentially following the physical market.
GFMS Metals Consulting has just launched the Steel Market Futures Briefing. This detailed Monthly Report (plus regular Updates) will cover billet, rebar, wire-rod and related raw materials such as scrap, HBI and DRI and will provide monthly price forecasts for the next year. 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.
Long product prices set new highs
We commence our coverage of steel long products as prices reach record highs. We believe that there is further to go on the upside, but the current surge will reach a peak shortly. As such, there is more risk to the downside than up. Our summary is as follows:
Over the last twelve months, our basket of global long products has risen by 44%. We are forecasting that the peak will be in May 2008, and our basket will be around 10% higher than at present.
In 12 months however, global long product prices will fall around 20% from the peak. On average, global long product prices in 2008 will be 40% above the average in 2007.
Our analysis suggests that demand is weak in mature economies, and this increase in prices is being driven solely by emerging markets. A reflection of this can be seen in prices in Europe and North America, which are lower than in the CIS, Middle East, Latin America and North Africa. Europe is currently a net exporter of long products, while the US imports of long products are at their lowest for many years.
Reduced export supply from Russia and Ukraine thanks to higher domestic demand is echoed by smaller suppliers such as Egypt, or other North African countries, and Brazil. Chinese supply to the global market has also shrunk due to higher export tariffs, although we believe the current high prices will begin to lead to an increase in Chinese export volumes from Q2, as spare capacity is present within China. Meanwhile markets in the GCC and other emerging economies continue to draw in long products.
The short and medium term price outlook
Our short-term view is that steel prices will continue to rise through Q2, but will probably peak in April or May. By Q3, we believe that demand will have softened both seasonally and on a fundamental basis, while the current panic purchasing may lead to higher inventories and will probably draw out more supply from high-cost areas. As such, in the medium-term, we believe that prices will come off highs, but will remain well above 2007 averages as higher raw material pricing combined with strong demand in emerging markets and limited additional supply will keep the market tight and vulnerable to price spikes.
For the billet market, GFMS Metals Consulting forecasts that monthly average billet prices in Europe (imports cif southern European port) will increase from $820/tonne in March to $880/tonne in May, but will then trend lower to $640/tonne in March 2009.
GFMS Metals Consulting forecasts that monthly average rebar prices (fob Black Sea) will increase from $830/tonne in March to $930/tonne in May. Prices will then retreat to an average of $760/tonne in March 2009.
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