Demand from Emerging Markets supports steel price

The spot price of hot rolled steel coil, steel rebar and plate has risen in 2008, in spite of slowing demand from the US auto and construction sectors.

For the moment, this trend is being more than offset by the expansion of demand from emerging markets. BRIC countries accounted for 40% of steel usage in 2006, according to the International Iron and Steel Institute. It forecasts that figure will increase to 45% in 2008, driven by large scale investment in infrastructure. Demand rose over 13% in China, Russia and Brazil last year.

Major steel producers are also enjoying better pricing power following a phase of industry consolidation. By 2006 the world's top ten steel producers controlled 27% of global production, compared with just 15% in 1999. This has allowed dominant producers to push for better terms in the contract market.

According to Charlie Awdry, Materials Analyst and Fund Manager of Gartmore's China Opportunities Fund, "China is the world's largest steel producer, followed by Japan and the US. China has had a 25% steel export tax in place to discourage product leaving the country. This had the effect of tightening conditions in the global steel marketplace. Tightening has been intensified by the severe earthquake experienced in China last month. The event prompted Chinese authorities to prioritise the production and acquisition of steel products for the reconstruction of infrastructure and 1 million temporary homes. This is reported to have contributed to Chinese inventory levels of commercial products to fall to low levels."

Gartmore's Emerging Markets Funds have overweight positions, relative to the benchmark, in a range of global steel producers, including Posco of South Korea, Usiminas of Brazil, Industrias CH of Mexico, Tata Steel of India and Evraz of Russia. Its overweight stance in metals and mining stocks contributed to Fund performance in the month to May 2008.