Capesize

13750

May-17
450.00 3.38%

Panamax

8300

May-17
-200.00 -2.35%

Iron Ore

61.5

May-17
-0.50 -0.81%

Sing 380

292.65

Jun-17

Coking Coal

177

May-17
1.00 0.57%

Nola Urea

172

May-17
3.00 1.78%

New impetus of Demand


Mark Mobius

In the midst of the over-supplied iron ore market, China’s “One Belt One Road” (OBOR) might come in handy as the new injection of demand for the long term.

Mark Mobius, executive chairman of Templeton Emerging Markets Group is particular optimistic on the China’s initiative to revive the ancient trade route infrastructure plan with funding of nearly USD900 billlion.

On the other hand, economic indicators of China did not perform well and incite analysts and economists’ fears of further slowing down the world’s second largest economy.

 

Additional 120 million tons of crude steel demand for the OBOR. According to Citibank, China’s “One Belt One Road (OBOR)” infrastructure plan might need a further 120 million tons of crude steel demand ahead. And Mobius opined, If the One Belt, One Road program proceeds, there’ll be continuing demand (for iron ore and steel).”

Perhaps, this is exactly the “new impetus” needed in the otherwise lacklustre market with high port inventory of 140 million tonnes as recorded by Umetal’s survey of 42 ports in China.

 

China’s Caixin Markit PMI drops to 11-months low in May. China’s Caixin Media and Markit Economics manufacturing purchasing managers’ index (PMI) went below 50 rating in May for the first time since June 2016.

The new 11-months low was recorded at 49.6 reading in May, down 0.7 from 50.3 rating in April. As Caixin and Markit PMI is used to track private manufacturers’ monthly performance, thus any reading that come below 50 indicated the sector is in contractionary, opposed to the expansionary mode with reading of 50 and above.

On the contrary, China’s official Purchasing Managers’ Index (PMI) indicated a growth of 51.2 in May, beating economists’ estimate. The latest rating has also hovered above the 50.0 reading over for the tenth straight month, reflecting the economy is still on expansionary mode, albeit at a slower momentum.

However, the growth of 51.2 is similar to the April’s rating which was a six-month low, showing that the Chinese economy has slowed down over the months.

 

High steel output recorded in China. China’s steel output achieved record-high level in April 2017 with an increase of 1% month-on-month to 72.78 million metric tonnes of crude steel production. The booming steel production came despite the Chinese government’s ongoing effort to curb steel capacity.

So far, the country’s excess steel output capacity crackdown was recorded at 31.7 million mt since the beginning of this year. At this rate, China is way ahead of its targeted steel capacity cut of 50 million mt by 2017, since more than half were already reduced within the first five months of the year.

The increase in steel output in April may be due to the high steel margins enjoyed by the mills. Thus, the most of the mills are running at full operating rate in churning more steel products to capitalize on the high margins.

 

Chinese steel exports fall in Jan-Apr 17. China’s steel exports have fallen by 25.8% to 27.2 million tonnes in Jan-Apr 2017. According to a trade source, Chinese steel is slowly losing its appeal among the Southeast Asian market, with only a third of China-originated steel products being exported into the region.

During Mar-Apr period, many Southeast Asian steel buyers had purchased rebar and billets from other countries instead, such as Russia, Ukraine, Iran and Turkey. In the meantime, the steel makers from Southeast Asian steel manufacturers seem to store up enough inventories to last through the monsoon season before they started restocking again later in August.

 

Julius Baer predicts iron ore prices toward USD50/mt. Switzerland-based bank, Julius Baer  has forecasted iron ore prices to move toward USD50/mt in the medium to longer term, on the basis that the Chinese steel production has peaked and output will decline over the coming years.

Moreover, further slowdown is expected in iron and steel futures as the Chinese government intensified crackdown on financial credit risk. According to Julian Evans-Pritchard, China economist at Capital Economics, a slowdown in credit growth is estimated in coming months due to credit tightening policies implemented by the Chinese authorities.

 

Coking coal buying spree slows on further price drops.  Indian coking coal buyers have slowed their second round of restocking post-Cyclone Debbie on the anticipation of further prices drop. In the meantime, a trade source expects some latent demand from smaller buyers to purchase some pocket-size lots.

The source felt that the Indian buyers are generally “more curious, rather than actively buying” up cargoes at the moment. Going forward, the coal demand in India is expected to weaker during the monsoon season that generally began from June to October.

In China, the coking coal inventory has risen sharply by 14.3% week-on-week to 2.23 million tonnes on 2 June 2017. The high stockpile has placed downward pressure on coking coal prices, while the mills were heard to be well-supplied generally at the moment.

 

Demand to the rescue. With huge supplies in iron ore and coking coal weighing down on prices, the mid -term market outlook does not look well for both markets. However, as pointed by Mobius, the long-term demand for steel and the steel-making materials like iron ore and coking coals are still high, thanks to the One Belt, One Road project.

Besides, China has implemented a stimulus infrastructure program this year aimed at achieving its economic growth to around 6.5% for 2017. Plus, there is leadership summit later this year, so the Chinese policymakers will ensure the economic stability maintained to a certain degree.