The Hindu Business Line : India, China seen driving steel demand for next few years

Increasing tightness in raw material markets continue to offer supportive price conditions, but risks associated with short-term price volatility will be greater than ever.

G. Chandrashekhar

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Mumbai, July 3 With huge investments continuing to flow into the infrastructure and housing sectors, especially in the two large emerging economies of Asia — China and India — demand outlook for steel has every reason to stay robust for the next few years.

However, the supply side is not without problems. Production costs have risen strongly, with soaring energy prices the key driver. Increasing tightness in raw material, energy and freight markets continue to offer supportive conditions for market prices. Both raw material and finished steel prices are likely to remain high during 2008.

According to a report from Barclays Capital, the recent surge in steel prices can in no sense be seen to have peaked, given the tightness in the scrap and raw materials market. Further, booming economies like China and India are likely to provide the impetus for steel demand for the next few years.

Risks

However, risks associated with short-term price volatility will be greater than ever. This calls for adoption of effective risk management strategies by producers, consumers and others.

The launch of LME steel contracts should enhance the risk-management capabilities of the participants, Barclays pointed out, adding that although hedging has not traditionally been used as a tool to mitigate price risk faced by steel market players, the LME contracts may quickly facilitate a pro-active approach to managing such risk exposures.

About speculators

Interestingly, there have been criticisms like the involvement of speculators contributing to the increased volatility of steel prices. Several steel producers, including the likes of Mr Lakshmi Mittal, have spoken about it.

But such concerns were voiced even as far back as the late 1970s when the first aluminium contract was launched on the LME. Aluminium has now become the most traded contract on the exchange, analysts remarked.

In April 2008, LME launched two regional physically-delivered steel billet futures contracts (for 65 metric tonnes of one size and length only), with one covering the Mediterranean region (delivering to Dubai-UAE, and Marmara-Turkey) and the other to the Far East (delivering to Incheon-South Korea, and Johor-Malaysia).

To start with, only 3-month and 15-month futures contracts have been traded, with the first delivery date set for July 28, 2008. The contracts have appreciated markedly.

Why billets?

To question as to why billets, experts pointed out that the billet has a large merchant market as well as positive physical qualities to be an exchange traded product. Billet is a crude form of steel that is used for rolling long products such as bars, structural steels and wire rod.

In addition, billet price correlates strongly with re-bar (finished steel) and scrap, creating additional hedging capability.

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