Steel Market Futures Briefing - June 2008

The futures market in action – will it work?

For the first time since its inception, we perceive a slight disconnect between the physical and futures market. The LME 3-month billet price is currently around $1,205/tonne for the Mediterranean contract. This is in line with CIS billet exports of around $1,180/tonne fob Black Sea. However, Turkish mills having completed sales of around $1,225/tonne fob are now looking for $1,300/tonne fob – around $1,340/tonne cif.

Theoretically therefore, a purchaser could secure billet delivered to a warehouse in Dubai (depending on charges) for lower than the physical market transaction price. If that is the case, then the buying interest will go up on the LME, pushing up prices back to physical market levels.

On the other hand, it could be that the LME price is correct, and the Turkish mills are being too optimistic, and will be forced to reduce their physical market prices (few transactions have been completed at that level). In our view, this is the correct one. Asian billet from China, Thailand and India can now be delivered to the Gulf market for around $1,250/tonne – up to $100/tonne below Turkish offers. Even with slightly shorter lead times and their high quality, we think that the Turks will be forced to moderate their offers if they want to complete transactions in the near term.

Further upside expected going into Q4
Nevertheless, Turkish mills are in no rush to sell having committed production through August. We are forecasting that scrap prices could go up by a further $100/tonne in July. Turkish mills have record margins available for finished product exports sold forward over August and early September and will be prepared to pay significantly more for scrap. Although European and Asian scrap prices have come down in the last two weeks as locally-oriented mills cut back on purchasing before a quieter summer season, we expect the increased deep-sea demand going to Turkey to facilitate higher prices.

As such, we think that prices will stay where they are for billet and rebar in most markets through July and the first half of August on weak demand. Any price weakness will be short-lived and minor. However, a return to buying for September and October deliveries by mid-August will push prices up again, supported by higher scrap prices at that time.

To access our previous reports on steel futures, click on the links below:

> Steel Market Futures Briefing - March, 2008.

> Steel Market Futures Briefing- April, 2008.

> Steel Market Futures Update - April 1, 2008.

> Steel Market Futures Update - April 30, 2008.

> Steel Market Futures Update - May 29, 2008.

> Steel Market Futures Briefing - May, 2008.

> This article gives the introduction to our latest detailed analysis on the market. In order to receive a free trial of the Steel Market Futures Briefing, please contact: info@gfms-metalsconsulting.com.

Disclaimer: Whilst every effort has been made to ensure the accuracy of the information used in this document, GFMS Metals Consulting cannot guarantee such accuracy and GFMS Metals Consulting does not accept responsibility for any losses or damages arising directly, or indirectly, from the use of this information.