At one level, it has been viewed that progress has been slow but steady and the real rise will be reflected in the spot purchases in the third quarter and contracts for the first quarter 2000.

The reasons again are based on the current production rates constantly falling short of demand which in its course would lead to a `shortage'. There are production cut backs and improvement in demand in certain regions. High prices of pig iron, slabs and billets are considered indication of a potential upsurge in demand for finished steel. The common sense says that if the prices of pig iron and semi-finished steel are high, the same is bound to push the prices of finished products as well. The present imbalance cannot continue for long. Although this logic is strong, the flip side of thestory is equally convincing. That the prices semi-finished products are abnormally high and that the next round of correction may bring those down with practically no change in the prices of finished products is also a possibility many experts do not rule out. Pig iron prices have shot up from about $80 -90 per tonne or less, fob, (depending on the country supplying it) to $100 - $115 per tonne recently.

This increase followed an equally substantial rise in the prices of steel melting scrap - from its pits at about $72 per tonne (for shredded ex-Europe) to a high of $97 per tonne. Although the trend was expected to continue further, the market turned backward with the prices falling to about $86 per tonne last week. The latest reports indicate a drop in the prices of pig iron as well by a small margin. The important point to note here is that the price differential between pig iron and scrap turned too large to have any economic sense. The price of each of these was determined by the specifics of thatmarket and in the process departed substantially from the historical and economically justifiable price differential.

Although such abnormal situations are not uncommon, in most cases, these are temporary and over a period of time the long term relationship between these products are re-established. The question is for the market to balance should the pig iron price fall or the scrap price increase ? The scrap prices fell in Europe in the recent weeks due to summer shutdowns of the mini mills. This is but a fleeting situation and as soon as the mills restart, the demand for scrap should go up. This can happen starting from September. By then, the winters in western Europe, Russia and Ukraine will reduce scrap collection and deliveries. At reduced supply and higher demand, scrap prices may start climbing beginning September right through the winters.

But, there are reasons also to expect scrap prices to remain within bounds at least for the time being. The global scrap substituting direct reduced ironproduction capacity is in much excess of demand. Although not economically viable to sell DRI at prices around $95-100 per tonne, the compulsions to keep the plants running may still force the producers to flood the market at the first sight of a recovery in the metallics market. Therefore, despite increased demand and reduced supply of scrap, the prices will be bordered by competition from the DRI industry worldwide.

Also, as far as pig iron is concerned, at below $100 per tonne, most producers other than those from the CIS may be unwilling to supply unless there are exigencies again to do so. But, above $110 per tonne, at least under present conditions, there will be many to do that - to take supply above demand. That brings the prices to the limit.

Although pig iron and DRI prices cannot reach the depth possible for scrap and the producers are forced to withdraw from the markets under absolutely adverse conditions, some of the major pig iron and DRI producers who had withdrawn from the market earlierare back at the present prices. This in fact has established the minimum viable prices of these products and also the state of competition in the industry which in no way show any cheerful projection.

Therefore, despite high optimism in the global market, the pig iron prices cannot be sustained at present level and are bound to fall to about $110-$115 per tonne in the immediate. If we assume that the scrap prices will increase to about $95-$100 per tonne at the most with the DRI prices also increasing proportionately, the current prices of semi-finished products like billets and slabs are placed reasonably. But the problem here is from the other end, i.e. prices of finished products.

The market for finished steel products has remained unpredictable and irrational most of the time. In May and June, in south east and east Asia, the prices of CIS origin rebars fell much below those of billets. The correction had taken place to some extent. But, there are still reports of the same continuing in selectplaces. The CIS export prices of rebars are still not higher than those of billets. The prices of hot rolled coils moved up substantially in the second quarter all over the world. Although the market looks strong in the south east and east Asia and the USA, the globalexport prices have moved up but slowly. The story is the same for cold rolled sheets. The market for galvanised sheets and plates have remained weak and in fact prices of these items have fallen in the recent weeks.

The question is at the current level of demand will the high semi-finished products will push the finished products prices up or that the force will be the other way round to level off the gains the semi-finished products made in the recent months.

In fact, even if with widespread trade cases, many countries like USA have managed to keep their domestic prices high, abundance of CIS steel continues to keep the global export prices in check. Perhaps, CIS steel will not see any further gains in the third quarter over and abovewhatever has been achieved in the second. Rather a decline is possible for hot products like billets and slabs.

There are still question marks over the real increase in global steel demand as the sticky prices at present do not really corroborate the assertion that the same is on an upsurge in the past few months. More important, even if steel demand goes up significantly the huge excess capacities in the industry will not allow prices to flare up.

The author is convenor, Steel Exporters' Forum. The views expressed in the article are that of the author and does not represent the organisation he is employed with