February 13, 2017
When US sneezes, so the saying goes, the world catches a cold. A fortnight ago, China brought the freight and iron ore markets close to a standstill as millions took off for the Lunar New Year holidays. It was left to the ‘I’ in BRIC (remember those) to drive the world’s major commodity markets and industrious India got busy while China slept.
The Indian government looks likely to maintain import duties on coking coal in the national budget for 2017-2018, creating concerns over the higher cost of steel manufacture among Indian mills. The result will be that India will reduce its coking coal imports and became more dependent on domestic supply.
However, the budget is favourably disposed toward infrastructure development in the construction of housing, the rural economy, infrastructure and defence capex. For the fruition of these projects, India will inject around Rs 4 lakh crore ($?) which will indirectly spur steel demand in various construction projects.
The long wait over. Thanks to the decision not to remove import duties, Indian coking coal buyers are unlikely to look to seaborne coking coal cargoes – higher procurement prices for imports, mean Indian mills will be left with little option but to snap up domestic products.
However, Iocal coking coal producers have introduced prices increases of nearly 20%, hitting steel-makers’ margins by forcing hard to absorb the surges in production costs.
This prompted the Steel Authority of India Limited (SAIL) to come to the negotiating table with local miners to reach a compromise, forming a committee with the world’s largest miner Central Coalfields Ltd to seek some common ground over the recent price spike.
ICVL to restart Mozambique mine. SAIL also announced during the week that the mining operation of joint venture company International Coal Ventures Ltd (ICVL) will restart mining operation in Benga mine at Mozambique mine in a few months’ time.
The rationale for the restart is tied to last year’s higher coking coal prices. ICVL had previously suspended its work in Mozambique mine in December 2015 following the crash in prices. However, the global price, which was USD 80/mt in January last year hit USD 283 per tonne in December 2016, greatly increasing profit margins of the miners.
Fig 1: Coking Coal prices
Source: TSI & SGX
ICVL hopes the restart will recover some of its costs and provide decent returns from the still relatively high coking coal price. After the restart of production, the Benga mine is slated to churn out 5.3 million tonnes per year – the mining complex is estimated to have reserves of around 2.6 billion tonnes.
SGX posts all-time high for coking coal futures. Despite breaking for the Lunar New Year holidays toward the end of the month, the Singapore Exchange (SGX) saw a record total of 870,000 tonnes of coking coal derivative volume traded in January.
Fig 2: SGX’s Coking Coal futures January volume
According to the exchange, January’s traded volume was more than entire volume cleared in whole of 2016, giving SGX the leading market share. The robust demand in coking coal futures has broken the usual seasonal lull in January futures trading by carrying over the strong trading momentum from the last quarter of 2016.
The huge volume was attributed to the involvement of BHP Billiton in SGX throughout 2016 which prompted a wider interest during 4Q16. For example, for November and December 2016 the total of futures volumes traded on SGX recorded nearly a quarter of a million tonnes per month. By the start of February 2017, the exchange saw the month-to-date volume traded of 75kt with open interest at 659kt.
China to import more iron ore in 2017. Meanwhile, Australia’s Fortescue Metals Group (FMG) has estimated that China may import additional 40-50m tonnes of iron ore in 2017 as the Chinese authorities seek to crackdown on the country’s high-polluting and low-efficiency electric arc furnace steel mills.
With the removal of this scrap-fired capacity, Chinese mills will rely more on the iron ore feedstocks and miners Rio Tinto, BHP as well as FMG may operate at maximum rate to address to the market needs. FMG maintained its commitment to meet or exceed its output guidance of 165-170m tonnes for 2016/2017.
In the meantime, China’s iron ore imports are off to a strong start in 2017 with a total of 86.6m tonnes discharged at Chinese ports during January 2017, based on Thomson Reuters Supply Chain and Commodity Forecasts.
In addition, a further 13.2m tonnes of iron ore imports were scheduled for arrival in Chinese ports by 31 January. Such robust import totals may topple the previous record monthly imports of 96.26m tonnes recorded in December 2015.
Jusging by the high imports volume alone, there seems to be fundamental justification for the strong start to 2017 for iron ore prices into China that shows little sign of easing.
In the light of increased iron ore demand from China, the Australian Bureau of Statistics has forecast a boom for Australian miners. The Bureau supports this claim with a total export of metal and coal valued at AUD 13.4bn (USD 10.2 billion) in December 2016 alone, beating previous records of AUD 12.4bn in December 2013 and more than double the AUD 6.4billion worth of coal and metals sold in January last year.