Steel - Will 2011 Continue to Mirror 2010?

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Steel - Will 2011 Continue to Mirror 2010?

 Steel – will 2011 continue to mirror 2010? So far, 2011 steel prices have

broadly mirrored 2010. Prices started increasing in November 2010, as seasonal

demand picked up, combined with a production pullback in the previous

months, led to the price increase which lasted till April. Since then, prices have

come off ~15% as production has increased. So far this is similar to what was

seen in 2010, when prices bottomed out in July, remained in a range between

August and November, and then started the up-move. Beginning in August of

last year production continued to trend down. The difference so far has been

China, where average monthly production between January and May in 2011

stood at 59MT vs. 54MT in 2010. From here in order for steel prices to move

up (coking coal is expected to remain elevated through the year), we need to see

a meaningful production pullback.

 Chinese steel production surge continues: As per the metals press (MB, SBB),

the Chinese steel production surge continued in June, with CISA reporting that

the daily average in the last 10 days of June increased to 2.018MT. Chinese steel

prices have softened recently, while spot iron ore remains elevated at near $175-

180/MT levels.

 India - While coal meeting gets postponed again, another step toward new

mining law: The much-awaited meeting on the coal situation has been

postponed. However, the GoM approved the new mining bill draft, which

among other things would effectively double royalty rates for non coal

companies, and for coal companies would entail 26% profit sharing. While any

clarity is potentially months away, stocks corrected sharply. We believe that

while Street estimates are likely to not be brought down (till there is some clarity

on the situation), stocks would likely price this in via lower multiples. (Click

here)

 Spot prices- iron ore remains firm, while steel continues to wobble: Spot

iron ore prices remain firm. Surprisingly, while CIF import prices into China

have been flat over the last one month, domestic Chinese iron ore prices have

declined ~7% over the same time period. Steel prices remain weak in most

markets across flats and longs. Domestic Indian DRI prices have declined, and

given the seasonal lull in long demand in India, we expect Indian long product

prices to weaken. Indian HRC prices remain weak, and we expect production

pullbacks to take place in the near term.

 Base metals update: JPM Global metals analyst highlights that ‘while the

central tendency for the analyst community, especially at JPM, is to take a

bullish outlook for 2H 2011, which should trickle down to a more robust

commodity price outlook, notwithstanding some near-term supply side issues in

energy (IEA1), there are a whole host of uncertainties, and one is the global

inventory cycle, whether it be at a macro or micro level.” The team highlights

that industrial metals right now have the right tailwind to break through range

resistance.