Capesize

17950

Sep-17
0.00 0.00%

Panamax

11175

Sep-17
225.00 2.05%

Iron Ore

76.5

Sep-17
0.85 1.12%

Sing 380

278.25

Oct-17

Coking Coal

208

Sep-17
0.00 0.00%

Nola Urea

212.5

Sep-17
0.00 0.00%

FIS Market Review: Weathering the storm


nanjing rain

(Image: Youyou/Asianewsphoto)

The torrential rains have hit central and southern China recently, causing much disruption to trade and communications. Likewise, the iron ore and steel market had their own “stormy” sessions last week with slumps in prices amid tepid demand.

Fortunately, the prices for both steel and iron ore gained back some lost territories on Monday, 12 Jun 2017, thanks to the driving demand forces on Chinese property market. As such, the prices of Tangshan steel billet, often seen as a barometer for steel demand in China rose by RMB 30 to 3,050 on Monday, following the gains of RMB 30 made over the weekend from last Friday’s closing at RMB 2,990.

Rebar futures also responded positively, clocking a three-weeks high growth of 1.4% to RMB 3,033 per tonne at the Shanghai Future Exchange (SHFE) on Monday. So will the resiliency of both steel and iron ore continue to weather the storm ahead or instead succumb to the mounting market pressures?

 

Credit crunch among Chinese mills. It was the time of the year again that mills need to pay attentions in paying dues to their creditors. Yes, we are referring to quarterly debts that mills often has to pay off toward the end of Q2.

With less cash at hands, the mills have less appetites for procurement and seemed satisfied with their current inventory obtained from their previous “mini-restocking” seen over the past two weeks.

Viveh Dhar, mining and energy analyst at the Commonwealth Bank has pinpointed this as the crucial factor for the slump of iron ore prices seen last week as the mills had little leeway in cash-flows to finance further procurement of seaborne cargoes.

 

Spot iron ore prices slumped to 11 month low. Last week, spot prices dropped by 1.07% to USD55.43/mt on 7 Jun 2017, Wednesday, its lowest reading since 8 July 2016. The root cause for the slump pointed to the high port inventory and lacklustre demand.

According to Umetal’s survey of 42 ports in China, the total port inventory stood at 140.18 million tonnes on Tuesday. Due to the high port inventory, most Chinese end-users prefer to buy stocks from docksides instead of seaborne cargoes as that will take longer delivery time and demanded higher prices.

 

Short term rebound for iron ore prices. Despite the low last week, Vivek Dhar, commodity and energy analyst at the Commonwealth Bank expected the iron ore market to kick-start a short term rebound in prices.

“With steel mill margins spiking higher, we see a strong case for iron ore prices rebounding modestly in the next couple of months,” opined Dhar.
Thus, the demand for raw materials are there but the Chinese ports still have record-high inventory at 140.18 million tonnes as of Tuesday, 13 Jun 2017. Therefore, it is likely that most mills will first drawdown cargoes from port inventory first, due to cost saving from transportation before turning their attentions to seaborne cargoes.

 

DCE 1709 dropped to RMB 418.5 the lowest in 2017. Just as an expected iron ore prices rebound are round the corner, the DCE 1709 contract slumped to its lowest reading of the year on 13 Jun 2017 at RMB 418.5 today, down almost 40% as compared to corresponding period last year.

The bearish sentiments for the contracts’ fall found its roots on the supply glut situation as most mills are believed to possess iron ore inventory at least for 22 days. The cooling measures in Chinese property market had gathered paces and might result a lukewarm demand in steel at the later part of the year.

Moreover, major miners such as Vale, BHP Billiton, Rio Tinto and Fortescue Metals Group (FMG) have also kept up high output of iron ore as evident from iron ore exports shipped out of Port Hedland.

In May, the Pilbara Ports Authority (PPA) recorded total iron ore exports totaled 44.076 million tonnes, up 11.9% year-on-year and surpassing the previous record high of 43.937 million tonnes set in December last year. Among the exports, around 38 million tonnes were shipped to China in May, up 9% month-on-month and up 20% at year-on-year basis.

Similarly, Brazil’s exports also hit record high in May 2017 at 35.11 million tonnes up 3.3% year-on-year, according to the country’s trade ministry. Prices of the iron ore exports then averaged around USD43.14 per tonne FOB, down 1.84% from previous week’s USD43.95/mt FOB. Both high export volumes from Australia and Brazil are expected to add downward pressure on the iron ore prices in the long term.

 

Nippon Steel makes landmark deal in adopting indexation to price coking coal. Japan’s Nippon Steel has confirmed its adoption of indexation to price premium coking coal for Q2 2017, instead of using the quarterly price system since its introduction in 2010.

The shift toward indexation was a response to the price volatility seen in coking coal pricing after the effect of Cyclone Debbie in Australia, where the buyer and suppliers could not reach a mutual agreement on fixing quarterly price for Q2 this year.

The milestone decision of choosing indexation over the quarterly benchmark might pose a permanent change to the industry, where other mills may follow Nippon Steel in opting for adoption of indexation on imported coking coal cargoes.

Thus, all eyes are at the Q3 price negotiation at the moment, which is expected to commence at two weeks’ time, on whether the Q3 negotiation will be done using index prices or stick to the traditional method of using fixed quarterly prices.

 

Short term rally follow by a slump ahead? In crystal ball grazing, things can go either way; Vivek Dhar may be right in sense that the near term with good margins, mills will continue to produce at full operating rates and consume iron ore materials along the way.

However, given the slowing down of the once red-hot property market, the demand of the steel may not be sustainable in the long run. Besides, as the monsoon season descended upon China, the demand of steel will once again impacted as some construction activities will be suspended due to unfavorable weather.