As the iron ore market moves toward the second half of the year, there is expectation that the market will be oversupplied from miners’ ramp up mining operation.
Iron ore producers have longed to chase the higher prices above USD60/mt first seen in mid-last year and began to expand mining operation to capture market share.
However, miners are not blinded by immediate profits but instead seek for stability over longer duration to enjoy the prices rally as long as it can. With this, the market may not plunge down rapidly but instead experience a gradual rebalance between supply and demand.
After all, the suppliers work on a simple formula – profitability, and no one want to repeat history where prices fell close to USD40/mt in early 2016.
Support prices through lower exports. Rio Tinto has since taken a lead on this by applying this simple strategy of curbing exports to support iron ore prices. The miner indicated that it will lower iron ore export in the H2 2017 to lift prices and boost demand.
Thus, Rio’s iron ore exports are expected to reside at the lower end of annual target for 2017 at around 330 million mt. For coking coal, the miner has set its sight lower for 2017 in producing 7.2 to 7.8 million mt as compared to previous output target set at 7.8 million mt to 8.4 million mt.
Rio cited the poor weather and rail maintenance programme for the slowdown in production which affected the shipment from Western Australia that slid 6% to 77.7 million mt in the three months to 30 June 2017, from 82.2 million tons in the same period last year.
This notion may reduce the supply glut in the market as during the first six months of 2017, iron ore producing countries of Australia and Brazil have only completed less than 40% of the schedule deliveries of iron ore, leaving a big potential for delivery volume in H2 2017.
BHP meets full-year iron ore output guidance in 2017. On the contrary to Rio Tinto, BHP Billiton has achieved full-year iron ore production target by meeting the bottom end of output guidance at 268 million tonnes in fiscal year of 2017.
During the final quarter of fiscal 2017, the world’s third largest iron ore miner produced 70 million tonne of iron ore by taking accounts of share production from joint venture partners to reach the lower end of the output guidance of 268- 272 million tonnes.
For the fiscal year of 2018, BHP has outlined annual target production guidance between 275 million tonnes and 280 million tonnes. The majority of iron ore produced by BHP were then shipped to China for steel-making.
Citigroup downgrades iron ore prices amid glut. Anticipating on rising supply, Citigroup has lowered its price prediction for iron ore to average USD48/mt in Q4 2017 down from previous estimate of USD60/mt. The rationale for the downgrades attributed to ample supply coming from Brazilian and Australian miners’ ramp up productions.
In particular, Vale’s S11D mine and Roy Hill mining complex were singled out as both would be soon operating at full capacity with the potential to add another 118 million tonnes of surplus in 2017 as compared to surplus of 60 million tonnes glut recorded in 2016.
In contrast, Morgan Stanley saw optimism in the market due to the recent iron ore prices rally and estimated the commodity to average USD63/mt for 2017, then USD58/mt in 2018 and finally USD54/mt in 2019.
Over 1 billion of iron ore imports to arrive on China’s shore. Maybe China has the capability to absorb the seaborne cargoes surplus in 2017, as the country is on track to surpass previous import volume high in 2016.
For the first six month of 2017, China’s iron ore import stood at 539 million tonnes, up 9.3% as compared to same period last year. In June alone, China imported around 94.7 million tonnes up 3.3% from May volume of 91.5 million tonnes, according to custom data. At this rate, the country’s annual total iron ore import may exceed 2016’s one billion mark volume at 1.024 billion tonnes.
Due to rising Chinese appetite for iron ore, Australia is estimated to increase its supply as well from 851 million tonnes this year to 885 million tonnes in 2018 and subsequently to 897 million tonnes in 2019.
China’s steel output hits overdrive. Playing up to bank’s fear of supply glut, China’s crude steel production in June achieved a record high of 73.23 million mt, up 1.3% month-on-month. The output volume was compiled by China’s National Bureau of Statistics (NBS) and the daily steel output figure in June was also high, averaging 2.44 million mt up 4.7% as compared to May 2017.
Crude steel production was high despite ongoing Chinese authority effort in reducing induction furnace capacity. However, the tabulation for induction furnace steel was previously discounted from official reports and the latest June reports included lost output from legitimate steel makers.
According to NBS, China has produced a total of 419.75 million mt, up 4.6% year-on-year, while its pig iron output for the six month periods also rose by 3.4% year-on-year to 362.56 million mt from Jan-June 2017.
NBS has highlighted the growth of the country’s gross domestic product (GDP) at 6.9% in the first months of 2017, up 0.2% as compared to 6.7% of Jan-Jun 2016 period. The H1 2017 GDP growth was mainly paid off by China’s ongoing effort of reforming their supply side with greater focus on quality development and complying with stringent risk control.
New round of inspection check begins among Chinese mills. Probably one way to reduce the steel surplus will depend on Chinese authority’s resolve to close additional capacity. Thus, a new round of quality inspection checks was introduced in July- Sep period 2017, 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 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.
Tighter coking coal supply from IIIawarra coal mine shutdown. In contrast to the surging iron ore supply market, the coking coal market saw tighter supply due to the prolonged closure of the IIIawarra coal mine.
Illawarra Metallurgical Coal is 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 due to gas level build-ups. However, the company’s Dendrobium mine or its second IIIawarra coking coal mine remains unaffected by gas concerns and still continued to function.
Among the two mines, Appin accounted around 60% of the production while Dendrobium accounted the remaining 40% of output. But coal from Dendrobium mine cannot be sold alone without Appin coal. Therefore, the IIIawarra coal might be not made available for sale to the market. So far, South32 did not state how long the force majeure will last but trade sources estimate that the suspension might take at least two to three months period before resuming operations.
Shortage of the IIIawarra coking coal is likely to hit the Indian coking coal buyer hard, as the product is popular among the Indian market. A trade source foresaw supply tightness in the Indian market and buyers will be actively seeking cargoes from elsewhere. Mozambique coal could be one of the possible avenues for imports to meet the supply shortfall.
On the contrary, Chinese coking coal buyers are less exposure to the force majeure declaration from South32. As the Australian miner does not have any term commitment to Chinese buyers for importing of IIIawarra coals.
The market may not plunge in heavy lopsided supply glut as doomsayers had predicted. Apparently, the producers of iron ore were aware of the situation and may want to reduce the output surplus gradually. Chinese authorities are also working hard in cutting down the capacity and we see the iron ore prices to average around USD60/mt throughout 2017.
Coking coal, however remained supply-sensitives with much exposures to mining disruptions and miners’ strikes. Expects short term prices volatility on tight inventory that put the coking coal swap in much pressure. And watch out for Indian restocking in late Q3 after the monsoon season which may peak the demand curve.