Steel: Already bad, support in sight ::Macquarie Research,

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Steel: Already bad, support in sight
Feature article
 With steel being a lynchpin of economic development, the recent concerns
over economic growth and sovereign turmoil have made many concerned
about the near-term future for steel prices. While there is no doubt that a
huge degree of risk remains in the market, we believe a combination of
factors, led by Chinese demand, offer fundamental support at current price
levels. Thus, while steelmaking is still not a pleasant business to be in, it is
unlikely to get significantly worse in the near term and prices may well hold up
better than more championed peers in the coming months.
Latest news
 LME base metals prices, after a shaky start, rallied strongly in trading on
Thursday, with lead and zinc at the head of the pack on gains of 5.2% and
4.1%, respectively. Copper climbed by 3.3% to close back above $4/lb, while
aluminium made a more modest advance of less than 1%. The RMB has
appreciated noticeably in the past few days, falling ~0.6% to under RMB/USD
6.40 – a level not seen since the 1990s.
 Following the recent rout in base metals prices, there has been a strong rise
in consumer enquiries, which has flowed through to increased buying activity,
including from China. It is notable that physical premiums for copper in
Shanghai have picked up by about $10/t over the last week to $60-80/t CIF.
Meanwhile, premiums for other base metals, including aluminium and zinc,
remain firm in all key regional markets.
 With markets watching data closely for any signs of deterioration in economic
activity, the drop in the high frequency initial unemployment claims in the US
was welcomed by markets. High frequency surveys will take on greater
importance for the market in the coming weeks, with statistics like the flash
PMI readings in Europe and regional Fed surveys in the next few weeks
shaping expectations for the direction of economic activity.
 The CME announced that it would raise maintenance margins on speculative
positions on Comex Gold futures from $4,500 to $5,500 at the end of
trading. While gold did pull back after rising to above $1800/oz, the drop
appears more in line with the rise in real interest rates (from incredibly low
levels) rather than any gold-specific trading issues. Platinum is now back
above gold, with Aquarius Platinum CEO Stuart Murray today commenting
that there is still a substantial gap between the miners and the unions in
regards to wage negotiations.
 That difficulty in maintaining copper mine output is a global phenomenon and
has been reinforced by China’s Zijin Mining’s H1 results, where output fell 5%
YoY to 44.96kt. Currently, Zijin has a 12ktpa copper mine in Fujian province
closed following a leak of contaminated water into the local rivers.
 McCloskey’s has reported that at least two shipments of met coal have now
been delayed following industrial action at BHP-Mitsubishi Alliance’s
Queensland coal mines. With the union vote on a potential working
agreement not scheduled until early September, further disruption is likely.
 ArcelorMittal South Africa’s Newcastle steelworks has suffered a structural
failure of its 1.6mtpa blast furnace, which will result in it being out of action
until Q4 while repairs take place.