Global Market Hesitates:Global Market Hesitates: Excess Supply, Soft Demand and a y

Limp Economy

Dublin, September 2010

www.steelbb.com

1

July 2010 edition:Weak demand and prices during Q3 could affect quarterly pricing of raw materialsaffect quarterly pricing of raw materials

August 2010 edition:Prices levelling off but set to increase

2

Prices levelling off , but set to increase from September/Q4 onwards

Global Economic Outlook• World GDP growth in 2010 : average 4.25% (forecast -

IMF) ... though better in Asia) g• European sovereign debt problems• Chinese government cools economy; RMB float &Chinese government cools economy; RMB float &

export tax rebate cut likely to slow exports • US growth in GDP has been slow since start of year g y

(NB revised 1.6% Q2 figure) • Auto production improved more than anticipated• Construction weak – stimulus packages near end• Earlier growth forecasts may not be met

/3/3

Global Economic Outlook

/4/4

Global Steel Outlook in 2010• Crude Production to rise globally by 15.6% (SBB):

G oba Stee Out oo 0 0

– EU 27 - 19.5%– USA - 28.6%– China – 14.8%

• Demand to rise globally by 10.7% (worldsteel):g y y ( )– Europe - 3.7%– USA - 26.5%USA 26.5%– China - 6.7%

• Earlier growth forecasts may have beeen too high

/5/5

Earlier growth forecasts may have beeen too high

Steel Market Overview • Input costs responding to short term supply

developments (eg monsoons etc) and Chinese needsdevelopments (eg monsoons etc), and Chinese needs.

• Inventory levels low …. little activity in Q3, despite t ti f hi h i i Q4expectation of higher prices in Q4

• Prices showing some signs of rising: producers are lifting offer prices (in part to stop them falling)

• Real demand growth generally slow

• Trader sentiment running ahead of a strengthening in real demand in Q4 (anticipated in Q2, but now less

/6/6

Q ( p Q ,likely)

Review of Raw Material Developments• Iron Ore:

A l b h k h i “b k ” ill t– Annual benchmark mechanism “broken” : mills accept new quarterly system

% f Q– Index-based settlement imposes 90-100% rise for Q2; Q3 another 30% plus; Q4 down 12% q/q

– 62% Fe spot prices rise from $100/t cfr end-November to $186.50/t end April; $143/t end-May, $115.90/t by mid July before rising to $141 20/t at start of Augustmid-July, before rising to $141.20/t at start of August, then higher and back to $141/t in recent days.

S t i i ll i t lid/7/7

– Spot is in yellow in next slide

Recent prices for Iron Ore $/tp

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Review of Raw Material Developments

• Scrap: prices volatile generally and responsive to buying in Turkey and Far East.

• Coking Coal: no index, quarterly deals; spot prices have been stable; now may weaken

/9/9

Impact of Higher Raw Mat Costs

Today’s Market (September 2010) European Union

S k b l l (b b ild) l EU d

oday s a et (Septe be 0 0)

• Stocks below normal (but may rebuild): latest EU data from June – higher sales, and lower inventories3rd t i t l• 3rd country imports low

• July and August - Flats prices softer due poor demand in Q3 holiday time low buying levelsin Q3 holiday time – low buying levels

• Production cutbacksL i f ll b k i Q2 i d li• Longs prices fell back in Q2 on scrap price declines: now maybe climbing in late Q3: producers looking for more but prices may not hold (eg €50/t for sections)

/11/11

more, but prices may not hold (eg €50/t for sections)

Today’s Market (September 2010) USA

S k b l l d i i l

y ( p )

• Stocks below normal and easing; imports are low• Flats: producers raising prices, but still unclear if these

ill h ldwill hold • Long prices were mainly steady; but many pushed

upwards for this month as scrap surcharges were upupwards for this month, as scrap surcharges were up $25/s.t.....

/12/12

Today’s Market (September 2010) Asia

SEA k l d d OK b i

y ( p )

• SEA - stocks normal; demand OK, but sentiment hesitant: domestic prices uncertain; import prices rising (eg billet slab)rising (eg billet, slab)

• Chinese flats domestic prices possibly increasing after recent falls but mills uncertain; high stocks;after recent falls, but mills uncertain; high stocks; futures screen trading a factor

• Chinese export availability not increasing in short-Chinese export availability not increasing in shortterm (rebate cut, yuan etc);

• India: demand strong: prices take account of

/13/13

g pimport availability

Pricing Outlook: the Rest of 2010

• Sentiment modest, despite earlier Q4 expectations

• Chinese outlook very uncertain

• Contract iron ore prices in Q3 are significantly higher Co t act o o e p ces Q3 a e s g ca t y g ethan in Q2 (for miners using a retrospective index-based formula); Q4 – possible 10% decline

• Spot iron ore prices in China now softer as steel market outlook is softer

• Scrap volatile, but wavering

• C d t l d ti tb k ( i l EU d Chi )/14/14

• Crude steel production cutbacks (mainly EU and China), during Q3 may have been insufficient

Pricing Outlook: the Rest of 2010

• Stock levels mostly low, and the industry is becoming d t ki ith d d i t i lik l t

g

used to working with reduced inventories… unlikely to change

• Demand likely to rise from current weak levels in USA and Europe in Sept/Oct, but unlikely to continue through whole of Q4whole of Q4

• Flats: EU and US increases will be attempted in S t b /Q4 hi h h ld d if d ti l lSeptember/Q4, which should succeed if production levels are in line with demand

/15/15

• Longs prices will be more stable or firm briefly as scrap costs rise, improved construction demand

Summary of Pricing Outlook • Chinese stimulus effect may be coming to an end,

government dampening demand

y g

government dampening demand • Q4 prices may firm a little in EU and US

R l d d h ld b f i d t t ki• Real demand should be fair; moderate restocking• Supply likely to be fairly stable, following H1

overproduction and Q3 declinesoverproduction, and Q3 declines• Demand may pick up in East Asia towards year-end

(seasonal factors)(seasonal factors)• Middle East demand to return after Ramadan• L ti A i d d t d /littl k

/16/16

• Latin American demand steady/little weaker• Global export levels unlikely to be high

Recent prices for HR Coil $/tp

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Recent prices for Rebar $/tp

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Other Pricing Issues – Looking Forward• Iron ore quarterly prices – “mini benchmark” - should

fall back for Q4 2010 (lower Q3 spot);

g g

fall back for Q4 2010 (lower Q3 spot);

• Q4 spot iron ore prices only higher if Chinese demand grows; this would lead to higher Q1 2011 iron ore pricesgrows; this would lead to higher Q1 2011 iron ore prices

• Steel producers still struggling to adjust pricing models (further changes in iron ore pricing structures probable)(further changes in iron ore pricing structures probable)

• Global steel making overcapacity, and probably also in a few years iron ore mining overcapacitya few years iron ore mining overcapacity

• Steel price volatility to continue – steel futures contracts developing to offer price risk management tools

/19/19

developing to offer price risk management tools