Steel prices set to bounce but not too high

By Humeyra Pamuk - Analysis

LONDON (Reuters) - Prices of long steel will bounce back from a recent 30 percent fall once construction work in the Middle East picks up after the summer lull, but weaker global economic growth rules out a return to record highs soon.

The price of long steel, a key construction material, has fallen sharply since July in major consumer the Middle East as work slows due to hot weather and ahead of the holy month of Ramadan in September.

"What's happening at the moment is partly seasonal," said Moody's analyst Matthias Hellstern. "Once this is over, I think prices could go up a bit again."

However, this year's summer lull and seasonality was not the whole story. Lack of demand from Europe and the United States and China -- because of the Olympics -- also fuelled the fall.

"Given the wider context of a general economic slowdown, we should expect to see an impact on steel demand," steel analyst Jeff Largey at JPMorgan said.

"Distributors of steel products may prefer to keep relatively lean inventories...while they wait to gain a better understanding of what demand will be in coming months."

So far this year, demand for steel seems to have decoupled from the slowdown in the United States and in Europe as a construction and infrastructure boom in the Middle East and emerging economies buoyed demand.

This, coupled with the sky-high cost of steelmaking raw materials such as iron ore and coking coal, has allowed steelmakers to raise prices several times, pushing them to all-time highs.

It may not be so easy to raise prices in the second half of the year, analysts say.

"As the global economy is moderating, steel producers are going to have to modify their expectations of further price rises," Largey at JP Morgan said.

The world's top steelmaker ArcelorMittal (ISPA.AS: Quote, Profile, Research, Stock Buzz) reported record second-half quarter results after it raised prices. Germany's top two steelmakers ThyssenKrupp (TKAG.DE: Quote, Profile, Research, Stock Buzz) and Salzgitter (SZGG.DE: Quote, Profile, Research, Stock Buzz) raised their profit forecasts after both reporting strong quarterly earnings.

The price of steel billet, a semi-finished form of long steel mainly used by the construction industry, rose to above $1,200 per tonne at end-June.

On the London Metal Exchange three-month Mediterreanean billet contract was bid at $755 per tonne on Thursday.

Several traders based in Turkey, a major steel supplier to the Middle East, and in the United Kingdom say that in the absence of European and American physical demand prices eased to around $900 per tonne for Black Sea free-on-board (fob) billets.

"The market looks quite ugly over the next month or so," said Jim Lennon, metals analyst at Macquarie Bank. "But then we'd expect a bounce back because we still don't see enough steel supply to meet demand."  Continued...