Commodity Markets: Steel margins lift the mood

By Titus, FIS

Sitting on the margins of RMB 800-1,000/mt from steel making, the Chinese mills have a decent amount of purchasing power to import raw materials.

First, the mills will priorities on snapping up good quality cargoes like high grade ores and coking coals to keep productivity at full capacity.

Even the China’s dockside inventory reached historical high levels, there is not stopping for mills to import high grade seaborne cargoes thanks to the pile of cash flow build up from the steel margins.

Iron ore prices head toward USD70/mt level. Spot iron ore prices has reached USD70/mt on 19 July 2017, driven by robust steel demand in China. As such, the Tangshan billet prices maintained its position at RMB 3,470 for three consecutive days on firm steel demand.

However, the commodity later retreated from the USD70/mt level, as traders seek clarification after three consecutive days of rising prices. Prices of 62% Fe Iron Ore Index then settled at USD68.15/mt CFR North China on Thursday, based on Platts assessment.

According to a trade source, the Chinese steel mills prefer to focus on iron ore stock consumption at the moment rather than purchasing cargoes due to rising prices. However, some steel mills may plan to replenish their stocks by a small amount in coming days, with focus on high grade mainstream fines.

Iron ore supply glut for 2017 to hit 100 million tonnes. Citigroup expects worsening iron ore supply of additional 100 million tonnes surplus this year, on top of the surplus of 60 million tonnes from 2016.

Thus, the bank predicted that prices will drop to USD45/mt in order to absorb the additional tonnage. Then, it was slated that the low prices will eventually force the Australian and Brazilian miners to cut their output, bringing equilibrium to the market.

In the meantime, Citigroup remained skeptical on how far the iron ore rally can last and foresaw a bearish outlook for the market. According to Citigroup, the ongoing crackdown on shadowy banking system in China may trigger a credit crunch among traders and lead to “rapid liquidation of steel and iron ore stocks”.

Samarco to restart operation by 2018. Samarco mining complex has extended its restart by 2018, in waiting for an approval of an environmental license. Once granted the Samarco complex will need around 5-6 months to prepare the facility for mining operation to resume.

Even then, the operation will not operate in full capacity as the miners still need to rectify the pellet quality as a result of changes in processing. In the meantime, a study group will survey the premises for the functionality of existing structures in the mining complex.

Due to these, BHP indicated that the 30.5 million mt/year pellet mining complex will miss an earlier target for resumption in the second half of 2017. Previously, Samarco mining complex, a joint venture between Vale and BHP was closed due to a dam failure incident back in 2015, which resulted to death of mining workers as well as environmental pollutions to nearby villages and surrounding areas.

Japan’s steelmakers use indices pricing for automotive sheet contracts. Japanese steel-makers are offering automotive sheet contracts to local and international carmakers for the first time in pricing them to indices instead of the quarterly or half yearly fixed prices contract.

This move was a break from historical norm where auto sheets were sold on long term basis at fixed prices and renegotiated after the duration of three months or six months. So far, Toyota Motors, Nippon Steels and Sumitomo Metals Corporation are taking leads in these practices based on indices pricing.

Through the inclusion of iron ore and coking coal indices in steel pricing, the steelmakers are able to pass on the price volatility risks of steelmaking to their customers, potentially even helping them to lock in a profit margin. Going forward, Japanese market may see a hybrid system where some steelmakers stick to the old quarterly fixed-price contracts, while other used indexes for pricing contracts.

Coking coal prices still going strong.  Prices of coking coal are unlikely to fall in near term due to the good steel demand in China. According to a trade source, the strong demand in coking coal lies in the good steel margins enjoyed by the Chinese mills.

Mills were heard to enjoy around RMB 800-1,000 margins in steel-making, and many mills want to chase for higher productivity by importing good quality coking coals and iron ore to operate in full capacity.

Thus, there are some enquires in the market seeking for cargoes at bid of USD173/mt FOB Australia for 67-69% CSR premium mid-vol coal. Similar interests are heard for second tier coal segment as well.

India to re-enter coking coal market. Indian coking buyers are likely to re-enter the market after the monsoon season. However, the Indian buyers are mainly concerned about the rising cost which were priced at USD175/mt FOB Australia on Friday for premium low vol, up USD6.50/mt at day-on-day basis.

According to a trade source, the trade participants from India will have to buy soon and many are just waiting for the prices to come down. Meanwhile in China, news of safety checks at domestic coal plants have prompted Chinese trade participant to consider procurement of seaborne cargoes. Some steel mills are planning to import just to store since they still enjoyed good steel-making margins at the moment.

In the meantime, there are increased buying interest on second tier segment as more traders from inside and outside China are seeking to buy alternative materials from the highly priced first tier coals.

South32 loses 1.4 million tonnes in yearly output. Australian miner South32 saw its coking coal output lowered at the fourth quarter after its coal mine shut down due to gas leaks. According to South32, the coking coal, production fell to 1.4 million tonnes in the June quarter from 2.1 million tonnes a year earlier or down 32% year-on-year.

The lower output traced back to suspension of its Appin colliery where workers were evacuated following a buildup of gas level. Thus, the miner will revise its production guidance when the reports of its fiscal 2017 earnings came out next month.

Conclusion. With plenty of cash to burn, the Chinese mills may fuel the market further with their increased appetite for good quality materials. As always, the prices rally of iron ore and coking coal fall solely on the steel performance of Chinese market. Expects short term bullish as all good things will come to end eventually.