Steel Market Forecast Briefing - February 2008

Prices set record highs in all markets

Prices in the last couple of weeks have soared even beyond previous expectations. As can be seen in our table, strip prices have risen by 13-14% over the month. US mills are now quoting over $800/tonne for Q2 sales, while European mills are asking for more than $900/tonne. With little supply from China, emerging market mills are asking for (and getting) $800-850/tonne fob for Q2 sales. The tight Chinese market is due to production problems because of the weather, holidays and power disruptions, while domestic consumers are on a buying spree on their return from holidays.

Global steel prices are now at record highs. Consumers are largely taken aback at the scale of these price increases, but with little alternative are being forced to buy at the higher prices if they need to. Initial resistance is likely to be followed by panic purchasing, which will probably facilitate further price increases through to at least May and most likely June.

As we have noted before however, the economic fundamentals do not appear to be hugely supportive of this pricing surge, while supply increases will be a factor in the second half of the year. We continue to forecast a decline after the current boom.

Mills claw back raw material increases and improve margins
The settlement between Vale and the Japanese mills (and Posco) for 65% for southern system fines and 71% for Carajas fines should be the accepted benchmark for iron ore prices in 2008. While the Australians may hold out for a freight premium basis, the existing benchmark system primarily benefits Vale, and it is difficult to see how the Australians will define their requirements in the near term. The increase in fob prices is equivalent to around 50c/dmtu.

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