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CIS billet exports to rally in Q4 after year of decline: analysts

By Ciaran Roe, European Markets Reporter, Platts

September 26, 2011 - Black Sea exports of the semi-finished steel product billet are expected to revive in the final quarter this year as stronger demand from Middle Eastern and North African (MENA) countries coincides with internal demand in Russia and Ukraine hitting a seasonal slump.

Sluggish summer 2011 exports followed a year of declining shipments from the Commonwealth of Independent States (CIS): Russia, together with Ukraine, traded 26.7 million mt of the 52.8 million mt of global semi-finished steel movement in 2010.

CIS analysts believe a factor for the reduction in Ukrainian and Russian exports, which began in August 2010, is the strength of the local market, where the construction segment has seen some recovery on pre-crisis levels.

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Many integrated steelmakers in Russia and Ukraine able to flit between slab and billet output chose to make more slab in spring of 2011 because slab export prices were more competitive -- and finished flat-rolled prices historically trend higher than long products.

As the summer progressed production problems arose at several CIS mills, hampering billet production, and CIS scrap prices rose high enough to slow output at several electric arc furnace (EAF) mills, further limiting output.

Sector price correlations volatile in Black Sea region: January 4 - September 22, 2011

However, export prices began to ease in late September as construction markets in Russia and Ukraine cooled ahead of winter.

Analysts do not think billet’s importance -- in terms of volumes or as a correlative product -- will wane as some of this year’s decline was related to revolts in MENA, a region which imported 11 million mt of semis in 2010.

Forecasting a healthier Q4, billet’s significance to the steel value chain is highlighted by the impact it has had on the market in recent months.

Traders of steel scrap tend to closely follow billet prices. Scrap is the key raw material for EAF-based steel which is used to cast billet. Billet is then rolled into finished long products such as rebar. (See related chart: Rebar margin drops as billet spread widens over Turkey CFR scrap: Dec 1, 2010 - Sep 22, 2011).

If billet falls relative to rebar, scrap recyclers may have to lower their offers to ensure business, because mills may decide to source more billet than usual and re-roll the semi rather than buy scrap.

Conversely, if billet prices push up, rebar producers and scrap recyclers may seek higher prices in selling their goods.

As volumes available for Black Sea exports remained low throughout most of Q3, the spot price started to squeeze rebar sellers’ margins in Turkey, whose export sale prices failed to rally overall.

Some mills in Turkey switched to largely billet export sales as a result, and re-rollers found their margins narrowed.

Recognizing billet’s significance in the steel value chain, the London Metal Exchange chose it as its first, and thus far, only physically delivered steel futures contract.

The contract started in 2008 as two elements: with an East Mediterranean and a Far Eastern market.

However, in late August 2011 at least one market player took a strong position in the volume of billet in warehouses registered for use in the LME contract.

By the August 23, some 85% of all warranted material had been cancelled, and one of the participants involved told Platts in an exclusive (link here) that the material would be drained from the warehouses.

The mass warrant cancelation and subsequent reduction in warehouse stocks prompted debate among users of the contract about the prospects of the LME’s steel futures market.

Q4 return for Russia, Ukraine billet exports

Three regional analysts forecast stronger export volumes Q4 this year when internal construction demand eases in Russia, and Ukraine, allowing greater volumes to reach international traders and export. (See related chart: Black Sea billet prices stay stronger for longer ($/mt): Jan 4 - Sep 22, 2011).

Higher volumes of billet should be available to export in the coming months as domestic demand, and prices, fall; export settlements may decrease in prices though, as rebar sales in MENA have either remained flat or marginally decreased over the last two months depending on the mill and country.

Greater supply will prompt a fall in CIS export prices -- a process already noted in the latest market reports -- allowing re-rollers to purchase with a profitable margin on finished product sales once more.

The week of September 19 demonstrated not only a turnaround in sales of Black Sea billet, but also a slight change in the LME’s contract, too. September 20 stocks in the contract were up to 50,115 mt, or 2,210 mt up on the previous day.

It was the largest input of material into any warehouse on the contract since the mass warrant cancelation registered late August.

Spreads also weakened from cash to 3-month, with a mild backwardation of $10/mt on September 20, after a steady fall in the cash price, compared to around $100/mt in late August.

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