April 19, 2017
By Titus Zheng, FIS Singapore
Like an over-filled glass, the iron ore market can no longer hold up to the pile-up supply glut and plunged to a free fall in prices to around the USD65/mt level.
However, some industry experts felt that the market is faring at its best to contain the oversupply from ambiguity seen in the Chinese market.
So no surprise here, the market may perform “as good as it get” for now and take nothing for granted before wild swings occurred for the better or worse.
Iron ore prices bend toward historical values of USD60-65/mt. With historical high inventory sitting at the Chinese ports, there are no surprises that a pullback on iron ore prices is expected. Nev Power, CEO of Fortescue Metals Group (FMG) is one of the believers for the price slide and expected prices to obey the historical range of USD60 to USD65/mt at a more sustainable level.
He stemmed his price predictions solely on the overloaded supply curve, while other analysts are more bearish with a median forecast price of USD57/mt at the last quarter for 2017. Others however are more optimistic such as the ABN Amro bank which predicted an average USD75/mt towards the end of 2017.
Supply finally overwhelms demand. China has produced up to 72 million tonnes of crude steel in March 2017, the highest so far and registered a jump of 1.8% year-on-year and an increase of 17.8% when compared to February 2017. On the quarterly basis, the Jan-Mar 2017 volume for crude steel output reached 201.1 million mt, an increase of 4.6% as compared to corresponding period last year.
Moreover, China’s pig iron production went up by 1.3% year-on-year to 62 million mt in March 2017. The increase of crude steel output was attributed to ramping up of operating rates by the China-based steel makers, as they seek to replace lost output from the previous crackdown of induction furnaces.
The significant of the supply glut was finally reflected in the iron ore pricing that tumbled towards USD60-65/mt region as compared to USD90-95 last seen in February 2017. Likewise, the supply overhang has caused Tangshan steel billet prices to tumble around RMB2,700 level from the height of RMB3,300 region in February 2017.
China scores 6.9% economic growth in Q1. Despite the supply glut in steel and iron ore market, China has managed to achieve an economic growth of 6.9% in Q1, 2017, the fastest in six quarters and beating previous forecasts. Most of the growth was contributed by the infrastructure stimulus development in the steel and property sectors.
Meanwhile, some bank analysts felt that the high growth in the first quarter of 2017 may be just “as good as its get” as China is too dependent on these two sectors to sustain growth. For instance, the growth in the services sector has weakened during the first quarter of 2017. Going forward, there are signs on a slower property growth ahead as sales started to fall as the Chinese authority tried to tame on credit availability.
So far, the China’s central and local governments had increased their spending up by 21% as compared to same period last year and worked hard to crack down on debt risks as well as China’s total social which reached a record 6.93 trillion yuan (USD1 trillion) in the quarter or roughly equivalent to the size of Mexico’s economy.
Relief for coking coal as Goonyella line reopens. Cyclone-damaged Goonyella coal rail system is expected to re-open on 26 April 2017, one and a half week ahead of schedule, much to the relief for the coking coal traders.
Aurizon, the rail operator of Goonyella line, made the announcement on Tuesday, 18 Apr 2017, and stated of all four lines affected by Cyclone Debbie, had since been restarted with the exception of Goonyella that yet remained to reopen for operations.
Coking coal buyers have welcomed the news of Goonyella line re-opening as they believed that it will put an end to panic buying toward the end of April due to supply disruption. Steel-makers were also relieved by the early restart and expected spot prices of coking coal to stabilize soon.
So far, the aftermath of Cyclone Debbie had costed Aurizon a reduction of 12-14 million tonnes above-rail coal tones for fiscal 2016-2017. Thus, the rail operator has revised its coal haulage range to 190-200 million tonnes for the fiscal year as compared to earlier target of 200-212 million tonnes.
POSCO forecasts Q2 coking coal benchmark to settle above USD200/mt. South Korean steel-maker, POSCO expects Q2 coking coal benchmark to settle above USD200/mt FOB due to the cyclone-caused coal supply disruption in Australia.
The POSCO’s announcement came at the same time as Aurizon’s announcement of early restart of the Goonyella line. Previously, the steel-maker has set the Q2 benchmark prices at the range of USD150-170/mt during the Apr-Jun period.
Moreover, POSCO also forecasts the Chinese reference import prices to settle in Q2 at between USD65-70/dry mt CFR China, down from USD86/dmt CFR China in Q1. So far, POSCO has seen an overall good Q1, recording a first-quarter operating profit of KRW1.37 trillion or USD1.2 billion, doubled of the KRW 659.8 billion earned the corresponding period last year.
Tokyo Steel keeps prices unchanged for May 2017. Japan’s Tokyo Steel Manufacturing has kept its products prices unchanged in May 2017 for the third consecutive month. Previously, the Japan’s steel maker has maintained the same prices in March and April 2017, with its main product, H-shaped beams at JPY 78,000 or USD719.10/mt, while rebar at JPY 56,000 or USD516.30/mt.
Tokyo Steel cited that the current pricing was a response to the slashing of prices made by the Chinese steel-maker for May delivery. However, the Japanese steel-maker did not rule out the possibility of raising prices in near term, boosted by the construction demand from the 2020 Tokyo Olympics projects.
The oversupply situation has finally been properly reflected on iron ore prices and steel prices after a bullish price rally seen in February. The more realistic prices had indicated a slowdown of demand in Q2 ahead, which is rather uncommon as April is traditionally the start of peak construction activities in China.
However, the good news is that coking coal prices may lower in near term with the re-opening of Goonyella line, which helped to ease the constricted steel margins. With margins to be earned, mills will once again produce in profitability manner and hopefully by then demand for the traditional construction activities will pick up in China and drawn down on the supplies.
Thus, the month of May will be interesting month in trying to achieve everything that went wrong in April and may in de facto herald the start of the heavy construction demand in China.