Bloomberg News

Food-Cost Surge on U.S. Drought May Bring Steel Slump, Alfa Says

July 24, 2012

Higher global food costs caused by the drought in the U.S. could lead to lower steel prices by prompting China to curb inflation and slow demand for metals, said Barry Ehrlich, a Moscow-based analyst at Alfa Bank.

A sustained 20 percent increase in agricultural prices in the U.S. could push up Chinese inflation by 260 basis points, as food accounts for about 30 percent of the country’s CPI, Ehrlich said in a report published today.

Soybean and corn prices climbed to all-time highs this week, as U.S. farmers face the worst drought since 1956, India delays sowing because of a late monsoon and below-average rainfall confronts Australian crops. China accounts for 48 percent of global steel consumption and any pull back on stimulus measures aimed at controlling inflation would slow home sales and construction, hurting steel demand, Ehrlich said.

“Investors should be alert that if prices remain at high levels or more higher, this will likely have a negative impact on steel demand and pricing,” Ehrlich said.

The risks are higher for Russian steelmakers, as rising global food prices rise may contribute to political and social tensions in oil-producing countries and “likely exert upward pressure” on oil and the ruble, Ehrlich said.

Russian steelmakers could see costs rising, adding to a squeeze on their profits as prices decline, he said. Steel prices are at about their lowest for at least two years minimum, Metal Bulletin statistics shows.

To contact the reporter on this story: Yuliya Fedorinova in Moscow at yfedorinova@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net


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