October 12, 2008

Citigroup improves 2008 steel forecasts as prices continue to rise

Platts reported that Citigroup is raising its steel price forecasts for 2008 while predicting margin expansion at US mills but warning of the potential for dropping prices later in the year.

Mr John Hill an analyst of Citigroup said the dichotomy of rising prices amid economic weakness and saw specific reasons for the phenomena. He said that "Steel prices have tacked on USD 100 per tonne to USD 200 per tonne since end 2007 and are at near records in the US, Europe and Asia. This is unusual during a US recession, and driven by a tight supply chain, raw materials escalation and structural change against a backdrop of weak end demand."

Mr Hill added that "With steelmakers onto their fourth and fifth round of price hikes since 2007 our forecasts have proved conservative. As such, we are raising 2008 HRC estimates to USD 743 per tonne and CRC to USD 840 per tonne, 2009 HRC and CRC estimates to USD 700 per tonne and USD 800 per tonne, and 2010 HRC and CRC estimates to USD 650 per tonne and USD 750 per tonne. This contemplates peaking spot market prices in Q2 2008, with gradual easing through 2009 and 2010."

Mr Hill said that captive iron ore and coke sources will allow US mills to see better margins. Our sense is that US mills are set for a period of strong margin expansion in Q1 to Q2 of 2008. Due to internal domestic iron ore and coke sources. He added that "We note that higher prices have developed in a slack demand environment with soft auto and appliance and potential spillover from residential to commercial construction. High prices remain vulnerable to a swift downside. The violence of the steel rally begs the question of whether this has involved raw materials anticipatory restocking or double ordering by end users and thus whether this has drawn orders forward from May to June. If so, prices could see a sharp reversal in mid summer."

Mr Hill further added that if the industry had misinterpreted a previous price rise just last year. Exactly a year ago, the industry misjudged a short lived seasonal re stocking bounce, and brought back idled furnaces in February and March 2007 just in time for orders to crumble. We see no evidence of a repeat of this dynamic, but is alert for any signs of excess Steel at end users.