* LME's global steel contract at 2.5-month high

* Merchant inventories at low levels, mkt tight

By Humeyra Pamuk

LONDON, July 30 (Reuters) - Steel billet prices held firm in
the Black Sea market this week on the back of rising scrap
prices and as merchants aimed to replenish their stocks before
an expected slowdown in demand for Ramadan kicks in.

Economic activity in the Middle East, a major consumer in
the Black Sea, Turkish and CIS billet market, tends to slow
during the Muslims' holy month, which is due to start towards
mid-August this year.

Traders say inventory levels are not very high and there is
some tightness in the market as Russian and Ukrainian mills keep
production at lower levels after demand has already started to
slow since April, giving them the upper hand to push up prices.

Traders said mills were offering Black Sea free-on-board
(fob) billet at around $510-520 a tonne, almost unchanged from
last week, while the price of scrap rose to $365 a tonne from
last week's $340-350 a tonne.

"Scrap prices have gone up this week, and mills did not
hesitate to raise the prices," said a UK-based steel trader.

Scrap is a key ingredient used by producers with electric
arc furnaces (EAC) in the making of billet, a form of long steel
used in construction.

On the London Metal Exchange, three-month Mediterranean
billet, now the exchange's benchmark contract, traded at $495 a
tonne, its highest since mid-May and up from $470 a tonne last
Friday.

"I'm not sure how sustainable these prices are with Ramadan
looming and things slowing down. Once they digest the new scrap
price, I would think the offers would come down," the trader
said.

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CHINA SLOWDOWN

Rising prices of raw materials such as scrap and iron ore
have been the major drivers behind a rise in steel prices
earlier this year from just below $400 a tonne in early February
to as high as $655 a tonne in April.

Major steel producers portrayed a less than rosy outlook
this week. ArcelorMittal, the world's largest producer, said
third-quarter earnings could be weighed down by slowing growth
in China, the top steel consumer, and high raw material costs.

"Looking ahead to Q3, the summer slowdown in Europe as well
as a relative economic slowdown in China is putting a constraint
on steel prices, while raw material costs continue to rise,"
Chief Financial Officer Aditya Mittal told a conference call.

This week in China, steel prices slipped back after a
short-lived jump as traders fretted over fragility of demand.

"Early lead indicators (scrap, iron ore, Chinese steel
prices) have rebounded of late, and as such this provides
some comfort steel prices will rise again in Q4 2010 after the
weakness over the summer slowdown," analysts at Credit Suisse
said in a research note.

"However (ArcelorMittal) management's assertion that a 10
percent increase in spot prices in Q4 is required to return to
Q2 margins seems a possible but by no means a given," Credit
Suisse said.

(Reporting by Humeyra Pamuk, Editing by Jane Baird)