GFMS - Flat Steel Products - 2010 Analyst Report

Flat Steel Products - One Year Forecast. Published January 2010.
Going into the New Year, we review our forecasts for 2009, as well as summarising our view for 2010. In January of last year, we forecast that average global HR coil prices in 2009 would be 35% below 2007 levels or $540/tonne. In fact, average prices were just below $520/tonne.

● In terms of our cyclical timing, we forecast that global prices would bottom in Q1 and rise in Q2 before declining in Q3 as excess supply swamped weak demand. While this describes Chinese prices, the rest of the world did not hit a trough until Q2, prices rose in Q3 and then dropped again. Nevertheless, we believe that we got the cycle right.

● We certainly would argue that our view that margins would not be enhanced due to excess capacity availability was the correct call, as was the view that prices would trade in a relatively narrow band for most of the year.

● During the year, we got somwhat ahead of ourselves in Q3, when we argued that the cut in inventories was so significant that prices would strengthen sharply. While there was some short-covering, which helped to propel prices higher, most distributors were rightly cautious of turning to additional inventory given weak demand and were happy to survive on hand-to-mouth consumption. Nevertheless, we would still argue that prices do have the potential to spike if demand comes back faster-than-expected given the low level of inventories.

While we give a 12-month rolling outlook throughout the year, the New Year is the traditional time to review our medium-term as well as our short-term pricing forecasts.

● We are forecasting that average global HR coil prices in 2010 will be $585/tonne – a 13% increase over 2009. We expect the overall pricing trend to develop as follows:

● Q1 – A strong improvement in manufacturing output from low levels in mature economies will combine with continued strength in Chinese and emerging markets. We expect to see prices return to the high end of the recent range. Raw material price strength as steel mills secure additional material will underpin price increases.

● Q2 – As output responds to higher price levels, we expect to see lead times shorten and prices hit a peak. With end-use demand in most mature markets remaining well below “normal” levels, there will be little incentive to re-stock aggressively. The outlook assumes a “slow” improvement in economic performance, as economies remain under pressure from high unemployment and financial constraints.

● Q3 – Prices weaken on over-supply of material and return to the bottom end of the recent trading range. Crucially, we also believe that the credit boom stoked in China will begin to fade at this point and fixed asset investment will slow as stimulus is withdrawn. This will lead to slowing Chinese demand and over-supply in this market.

● Q4 – Excess Chinese supply and aggressive pricing (facilitated by falling raw material prices as steel mills cut output) will push prices back down towards cyclical lows.

● We are confident of our shorter-term outlook, but note that the outlook for the second half is more speculative. Overall, we have a 60% confidence in our core outlook.

Web site: http://www.gfms.co.uk/
For further information please contact Carmen Eleta 
carmen.eleta@gfms.co.uk +34 699440610

For full report, see attachment.