Commodity Monthly Update – February 2010

Base metals pack, which registered a strong comeback in 2009, has unexpectedly found some strong resistance in the start of 2010. Base metal prices in the first two months of 2010 are under pressure on rising concerns over the state of the European economy and on expectations that the monetary tightening measures used by several central banks to curb liquidity will curb the demand growth. The selling pressure on base metals has also intensified after the US President curbed the trading activities of US banks. Though metal prices managed to bounce back form its lows in the last one week, the tone in the market remained negative. Contrary to the base metals market, the ferrous space has witnessed steady increases in both raw material and finished goods prices. Chinese exporters have increased offer prices of HRC by US$20-25/ton during the month of February to offset the jump in raw material costs. However China's finished steel exports fell in January, ending six months of consecutive increases as high offers started to turn off buyers. Overseas buyers too became cautious and reduced bookings when Chinese export offers were raised to a high level. Iron ore prices after a slight dip in mid month, firmed up to US$130/ton levels. We believe that the steel end users in the European and American region will not absorb the increase in steel prices. Hence, we expect the increase in steel prices will be lower than the increase in raw material costs, leading to pressure on margins of non-integrated steel manufacturers.