FIS Market Review: Make Peace, Not War


As the dust settled at the recent G20 meeting in Hamburg, the steel industry is finding itself at the wrong end of the limelight on the eve of a new trade war.

No firm conclusions have been made on the matter yet but the US is expected to make an announcement in coming weeks in its fight against the global excess supply of steel. Tariffs of up to 20% imposed on steel imported to the US are likely if the Trump administration stick to its guns.

How a trade war will impact commerce in the future is uncertain – the steel demand in China is glowing red-hot with steel capacity reductions on track and fast approaching their annual targets for 2017.

China’s unmatched zeal in steel capacity cuts. Hebei, China’s largest steel producing province, has reduced 12.26 million mt per year of pig iron and 10.53 million mt of crude steel capacity within the January-June 2017 period.

In fact, the province is on the fast track in reducing excess capacity with cuts of 67.4% and 75.5% on pig iron and crude steel respectively in the short span of six months. At this rate, Hebei will keep its annual crude steel output within 250 million mt by the end of 2017 – or perhaps will have reached the target at much earlier time.

Overall, China is fast achieving its annual target for steel capacity reductions. As by the end of May, the country had cut around 85% of the steel capacity of its annual target of 50 million mt/year. In the meantime, the country has closed around 120 million mt/year of induction capacity by end of June 2017, affecting a total of 600 companies which reportedly had suspended production from induction furnace and cut off power and water supplies relating to the output operation.

The fast-paced capacity cut has supported a relatively healthy margins for steel-makers and steel making profitability is likely to keep mills afloat throughout 2017.

Chinese mills forego maintenance to chase productivity. Steel making margins remained strong among the Chinese steel-makers, prompting many mills to postpone overhaul maintenance for their furnaces in the summer and instead press for full operating rates.

The Chinese mills are also likely to import more of high grade iron ores to improve productivity since they are enjoying healthy profits at the moment and are less concerned on the higher price tagged on high grade ores.

Tangshan billet prices, the barometer of steel demand have continued to rise by RMB 40 to settle RMB 3360 on 11 Jul 2017. However, some traders are concerned on the large iron ore shipments arrival in August that may aggravate the supply glut situation in Chinese ports in near term.

Steel inspection checks lend support for rising prices. China’s steel industry will be subjected to a new round of quality inspection checks during July and September 2017 period. The spot check will mainly focus on reducing steel capacity that produce low-grade steel.

According to the country’s General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), around 100 mills will be randomly selected for inspection checks. Mills that fall short of the quality checks then are in risk of losing their production licenses if they do not improve quality within a certain timeframe.

So far, the authority has shut down around 600 steel mills since January 2017 with a total reduction of 120 million tonnes capacity. Most of the mills were asked to shut down as they were producing low grade steel and were using highly-polluting and small low-tech furnaces.

 China’s PMI shows a rebound in June. China’s PMI is on the rise again, indicating the economy is still expanding, despite market concern on an imminent slowdown. In June, the China’s IHS Markit/Caixin manufacturing purchasing manager index (PMI) bounced up to 50.4 ratings in June from 49.6 level recorded in May 2017.

Any reading above the 50 level shows that the economy is growing and the improved orders have definitely supported PMI in June, as compared to May’s reading of 49.6 which was the first contraction in 11 months for China’s private manufacturing sector. During the month of June, the reading for output was recorded at 50.6, higher than 50.2 recorded in May. Similarly, the new orders hike to a three-month high at 51.0 as compared to May reading of 50.3, with new export orders also rising.

Some analysts have interpreted June reading as a “rebound” with the possibility of economic downtrend to be confirmed at latter stages. As many small and medium sized firms, SMEs are expected to wrap up their businesses this year due to cash-flow problem and lack of profitability. The SMEs were reported to contribute about 60% of China’s industrial output, boosting job creation of nearly 80% for the country.

Meanwhile, China’s official PMI for June was recorded at 51.7, higher than May’s reading of 51.2. The official PMI reading focuses on mainly large state owned enterprise, while the IHS Markit/Caixin PMI has its focus on smaller private companies.

Australia corrects iron ore prices over next two years. Australia’s department of Industry, Science and Innovation has forecast iron ore prices at an average of USD62.40/mt for 2017, down from an earlier forecast of USD65.20/mt. So far, the department has averaged iron ore at USD74/mt for the first half of the year and believed that the prices will lower gradually during the second half of the year.

The rationale for the downward price correction is attributed to the anticipation of the slowdown in infrastructure spending and construction activity in China over the next two years. Then, the lower demand in steel-making components namely iron ore and metallurgical coal are expected to wane amid higher supply from ramped up mining operations.

For 2018, the department predicted iron ore prices to average below USD50/mt and remained under the mark through 2019. Prices are slated to range USD49-51/mt in 2018, then average USD47/mt in 2019.

 India’s SAIL in talk with Teck Resources to diversify imports. Steel Authority of India Ltd (SAIL) has been in talks with Canada’s Teck Resources (Teck) over long term purchases of coking coal. India’s Steel Minister Chaudhary Birender Singh noted previously there was lots of price volatility in coking coal due to the after effects of Cyclone Debbie. Therefore, he felt that India should diversify its sources of coking coal imports as the country needed around 56-57 million tonnes of coking coal yearly with imports accounted nearly 85% of them.

However, the figures may more than double by the end of fiscal year in 2031. It was heard that the SAIL and Teck may sign a preliminary agreement in near term, joining top buyers from China and Japan in securing long term import deals with Teck.

Extended suspension in Illawarra mines raise concerns. The prolonged shutdown of the Illawarra coal mine may affect the coking coal supply in the market, arraying to traders’ fear of higher prices. However, most Chinese coking coal buyers stated that they are well-stocked at the moment and relatively unaffected by the supply disruption from Illawarra mines.

But if the mine suspension continues, the disruption could be deemed as a serious issue among the Asian coking coal buyers, according to trade sources. Illawarra Metallurgical Coal is currently owned by Australian-based South32 and company has previously ordered its workers to be evacuated from underground operations at Appin Colliery on 28 June 2017.

The evacuation was issued following the gas levels build-up in the mine operation near Appin Colliery. However, the company’s Dendrobium mine or its second Illawarra coking coal mine remains unaffected by gas concerns and still continued to function in mining operations.

Concluding thoughts

A trade war may be imminent, but currently the market remains absorbed by red-hot Chinese steel demand. China’s latest PMI indicator has also improved market morale on the growing Chinese economy as against previous forecast of slowing economics. So with much focus on Chinese demand of steel at the moment, the upcoming trade war (if it comes to fruition) might be overshadowed by the market buzz. Let’s hope the market will continue that way for a long time, make peace, not war…