Commodities | Jan 08 2009
By Chris Shaw
Having peaked first, Asian steel prices were among the first to fall as well, halving between October and December last year to return to levels last seem in 2005. Global prices also fell heavily, with Westpac senior economist Justin Smirk noting market benchmark prices have declined by 40% in the US, 40-50% in Europe and between 20-50% in China from their relatively recent highs.
The price falls have coincided with rising inventories and Smirk points out this trend has been strongest in Europe, where the price outlook appears the weakest given poor physical demand. While this suggests a poor market outlook, Smirk takes the view there are actually a few positive factors. The major one is signs Chinese demand has found a base of late.
He notes Chinese imports of iron ore for November were broadly equal to levels of a year ago, meaning even while its economy is weaker now, its imports have simply stopped growing rather than falling in line with the level of economic activity.
This indicates Chinese demand is a function of domestic factors rather than reflecting the state of the global economy. Australian data is also somewhat supportive for prices, as the bank notes early reports from Port Dampier indicate a pick-up in the iron ore trade in December.
This has helped push prices higher. Smirk notes spot iron ore prices have risen by 16-24% from the lows of October last year. Scrap metal prices have also recovered somewhat, as after surging late in 2007, prices then collapsed in 2008 to also return to 2005 levels. They have since risen by more than 50% from their early November lows.
With China’s recently announced stimulus package including a large portion of infrastructure spending, Smirk suggests it is not surprising Chinese steel producers appear to be chasing an early settlement to current contract price negotiations.
At present, he suggests contract prices in the year ahead are likely to settle at something around 30% below the previous year’s levels. However, data for December and January will be watched closely for signs that could cause an adjustment to this estimate.
