Global steel prices - brace for a correction?
LONDON (Reuters) - Sky-high production costs, strong demand and tight supplies have pushed global steel prices to new highs so far this year, but a correction may be on the way towards the end of this year, analysts say.
Global steel prices have risen by 40 percent so far in 2008 as an export tax in China has halted supplies out of the country, squeezing the world market.
Production costs have more than doubled, with the price of key steel making ingredients such as coking coal and iron ore having risen by 300 percent and at least 65 percent respectively.
Major steel producers have managed to pass on their rising costs to their customers. ArcelorMittal (ISPA.AS) for example has raised its prices several times in the last four months.
Analysts say there's still room for prices to climb higher, but then a bumpy rise might be at the door.
"At the moment most indicators we track are suggesting tight fundamentals and possibly higher prices," said Neil Buxton, analyst at industry consultants GFMS.
Buxton explained the reasons for higher prices as "cost pressures, lower exports for some products from China as well as surprisingly strong demand conditions".
Citi has recently raised its 2008 average hot rolled coil (HRC) and rebar benchmark price estimates both by more than 14 percent to reflect the cost increases of iron ore, coking coal and scrap prices.
"Underlying steel demand is expected to remain solid for at least H1 2008," the Bank said. "However, we believe current steel demand is partly driven by inventory re-stocking, as distributors and other consumers anticipate higher prices related to raw material cost increases."
SIGNIFICANTLY DIFFERENT
Despite the short-term upbeat outlook, analysts say the honeymoon could soon be over.
"We feel that the situation in six months' time could be significantly different," GFMS's Buxton said.
Jim Lennon, analyst at Macquarie Bank, echoed him: "We've had this phenomenal price rise. Are they going to keep going high forever? I think that's highly unlikely."
Tightness in the steel market could be reduced once shortages for raw materials such as iron ore and coking coal ease and when China comes back on to the market.
U.S. economic slowdown could also help ease demand.
"I would expect China to come back to the export market because the international prices is so much higher than the domestic prices," analyst Jim Lennon at Macquarie Bank said.
"So there will be more material coming out of China through the balance of this year and demand of Europe and the United States will slow a little bit," Lennon said.
China is the world's top consumer and producer of steel and alone accounts for about 35 percent of world consumption. The Middle East, India and Brazil are the other major consumers.
On the demand side, some suggest the appetite of the developing world will be enough to compensate for a possible loss in the United States and Europe.
Others are not so sure:
"Underlying conditions in the Middle East are pretty strong, but that's not necessarily enough to support prices if conditions weaken in other markets -- which is sort of what we expect," said Buxton of GFMS.
(Reporting by Humeyra Pamuk; editing by Chris Johnson)
