July 30, 2010 – * 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)
