January 9, 2017
As we ushered in a New Year – the year of the Rooster based on Chinese Zodiac – there are signs that demand for steel making materials may see a change or a re-allocation at least to emerging markets other than China.
There is no doubt that China will continue to play a dominant role in the steel complex but its colossal neighbour to the south-west, India may get a bigger share in the months ahead.
India to lower import duties
India’s steel ministry has sought to reduce the import duty on coking coal and nickel for the upcoming budget allocation at February 2017. The proposal is in line with the Indian Steel Association (ISA), the industry body representing primary steel producers, which previously asked the government to bring down the import duty of all raw materials used for steel-making to zero.
Currently, the import duties for nickel are at 5%, while the coking coal is at 2.5%. So far, India has been heavily dependent on import of coking coal, as the domestic quality has higher ash content which is unsuitable for the steel industry with present technology.
Similarly, Indian end-users such as the Process Plant and Machinery Association of India (PPMAI) had also urged the Indian government to cut down import duty on steel products to 7.5% from 12.5%. The association believed the cuts will make the capital goods like high-quality steel to be more easily accessible to the end users yet cheaper as well in reducing operating costs.
Moreover, the reduction in import duty may benefit nearly 90% of the Small and Medium Enterprises (SME) which import high grades steels and stainless steels on regular basis.
If the bill got passed through in the upcoming national budget, the Indian-steel makers will have more access to the international coking coal supply and potential lowered their operation cost and made their products more competitive externally.
China to consume more of its steel
According to BMI Research, China is expected to produce 825 million metric tonnes (mt) of crude steel for 2017, up 0.5% from 2016. Of these, 87% of the finished crude steel products will be consumed by China itself as the authority continued the infrastructure stimulus well into the new year.
Based on BMI’s forecast, China’s domestic demand will narrow the global steel market surplus to 3.2 million tons in 2017 from 10.9 million tons in 2016. In the meantime, steel productions in China are reduced due to the environmental protection regulations. Just last week, 25 cities in China were placed under red alerts warning, followed by 20 cities including Beijing are labelled under orange alerts, while another 16 cities were under the yellow alert.
Under the red alerts warnings system, various inspection teams will be dispatched to the heavy industry sector including steel plants and if found not to be compliance with safety regulations, the factory will be forced to close down. Due to some of these temporary shutdowns, the prices of steel products such as Tangshan billets have fluctuated under short term market shocks.
FIG 1: Tangshan billet prices
Hebei sets target for output cut in 2017
China’s top steel-producing province, Hebei has targeted to cut 31.86 million tonnes of steel and iron-making capacity for 2017. The steel production reduction will be progressive in nature, with first a milestone of 31.17 million tonnes cut by 2017, and then by 49.13 million tonnes by 2020.
For 2017, the city authority of Hebei planned to cut 15.62 million tonnes of steel capacity and 16.24 million tonnes of iron-making capacity by the end of 2017. Previously, Hebei had slashed off 14.22 million tonnes of steel capacity by the end of October, achieving 2016’s target of 14.22 million tonnes ahead of schedule.
Australia forecasts USD51.60/mt iron ore price average in 2017
Australia’s department of industry, innovation and science predicted iron ore prices to fall beyond current market prices for the next two years due to the increasing supply in the long run.
Thus, the ministry forecasted iron ore to price at the average of USD51.60/mt in 2017 and USD46.70 in 2018. The rationale of the bearish forecast was based on market fundamentals that suggested that the current steel rally is unsustainable and supported mainly by speculative trading and temporary lift in Chinese steel production.
In the meantime, iron ore shipments to China from Australia’s Port Hedland terminal had hit a record 37.4 million tons in December 2016, boosted as users such as BHP Billiton and Fortescue Metals Group ramped up production.
In China, the total iron ore inventory of 42 ports recorded at 112.03 million tonnes on 6 Jan 2017 , up 2.74 million tonnes week-on-week, and a record high as compared to last year inventory that recorded around the 100 million tonnes level. The sudden rise in inventory level was attributed to the good bout of weather that offered vessels greater visibility from the smog to safety unloaded cargoes at docksides. Thus, the prices of iron ore will be placed under downward pressure as supply increased gradually over the long run.
FIG 2: Iron ore inventory
Iron ore futures off to a shaky start
Chinese Iron ore futures took a dive amid high ports’ inventory and high volume of exports. On Friday, 9 Jan 2017, the most actively traded May 2017 iron ore future on the Dalian Commodities Exchange (DCE) dropped by 1.37%, closing the session down at RMB 539.5. The decline was followed by the rebar futures that slid by 1.09% day-on-day to RMB 2,911.
Since the start of the year, DCE Chinese futures had dropped consecutively till 5 January 2017 where it gained for the first time in the week before falling again on the 6 January 2017. In the meantime, the Singapore Stock Exchange (SGX) saw its iron ore options volume totalled 24,010 lots, up 393.0% week-on-week. Throughout 2-6 January 2017, the calls continued to dominate trading activity for the second consecutive week at 62% of total volume.
Meanwhile, open interest closed the week at 671,624 lots, up 2.5% week-on-week. During the week, the calls accounted for majority of trading, increase in open interest was approximately even between calls and puts.
FIG 3: Put Call Ratio
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