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Issue 13 / March 2014www.twitter.com/PlattsSBBSteel
STEEL RAW MATERIALS MONTHLY
Iron Ore Market Focus 3
Iron Ore Data 5
Metallurgical Coal Market Focus 6
Scrap Market Focus 8
Alloys Market Focus 9
Special Report 17
Global Trade Highlights 19
Steel Raw Materials Monthly Averages 20
Key price assessment monthly averages, February 2014 Unit Average change % changePlatts IODEX Iron ore fines 62% Fe CFR North China $/dmt 121.24 -6.91 -5.39
Platts Coking Coal, Premium low-vol FOB Australia $/mt 122.97 -5.45 -4.24
Platts Ferrous Scrap HMS CFR Turkey $/mt 357.00 -35.84 -9.12
TSI Iron Ore Fines 62% Fe $/dmt 121.37 -6.75 -5.27Chinese imports (CFR North China port)
TSI Coking Coal, Premium hard, $/mt 126.22 -4.49 -3.44Australian exports (FOB port)
TSI Ferrous Scrap HMS 1&2 80:20, $/mt 358.70 -36.57 -9.25Turkish imports (CFR port)
Chinas steel sector must adjust to slower growthChinas steel market is bracing for another challenging year in 2014 after the central government set a conservative GDP target of 7.5% - down from last years 7.7% - which should translate into steel output growth of 3-4% compared with an increase of 7.5% in 2013.
Chinas soaring steel production has come off the back of strong economic growth which has slowed since 2011 when GDP fell below double-digit figures to 9.2% before sliding to 7.8% in 2012 and to 7.7% last year. GDP is expected to remain in the 7-8% range for the coming two decades, according to Zhu Baoliang, director of Economic Forecasting Department of State Information Center.
Since its inauguration last March, Chinas newly-elected central government has abandoned the decades-old strategy of maintaining high GDP growth and is instead aiming for more sustainable economic growth, Zhu told delegates at a recent iron ore conference in Wuxi in east Chinas Jiangsu province. The change of strategy in Beijing has forced local governments to fine-tune their economic planning, Zhu said, relieving local governors of the need to meet aggressive growth targets to satisfy annual performance reviews. This had been one of the major drivers of high steel production.
Growth of 7-7.5% will be sufficient to keep inflation within 3.5% and to create 10 million new jobs annually, while at the same time battling pollution and overcapacity in industries such as steel, Zhu said.
Beijing has made it clear it will not inject any substantial investment into the economy during this or coming years, deciding at the annual parliament meeting in March that this
years fixed asset investment will be trimmed to 17.5% from last years 19.6%. This will coincide with the trend towards lower foreign direct investment being seen in China.
Importantly, there will be no repeat of the massive stimulus program rolled out over 2008-2009. Moreover, half the stimulus was shouldered by local authorities, forcing them to seek bank funding at high interest rates as issuing local government bonds was banned. Consequently, many local governments today are saddled with huge debts dating from that time, incurring interest charges they cannot afford.
The central government reiterated its commitment to eliminate 80 million mt/year of steel capacity nationwide by 2017, with 60 million mt/year to be removed from Hebei province alone. Indeed, the governments determination to achieve this has surprised steel market watchers, and convinced sceptics who hitherto dismissed the various edicts made over recent months as platitudes to pacify citizens.
The Ministry of Industry and Information is finalizing details on new steel industry standards, which will include criteria for power consumption and waste emissions. Once implemented, these could lead to closures of medium- and small-sized steel mills, particularly those which are unwilling or unable to upgrade their facilities at a time of weak steel prices and wafer thin margins. For larger and state-owned mills, additional investment will likely result in steeper financial losses, sources say.
For steelmakers, chasing opportunities for expansions in steel capacity will be unwise. Rather, they will need to restructure their steel operations with a view to making higher value products.
Marginal ton queryAside from a couple of price shocks in recent years, iron ore prices have rarely stayed below the $120/mt level for very long before recovering. Received wisdom has it that a significant tranche of Chinese domestic iron ore is unprofitable at these levels and as it is needed by the steel sector the price must inevitably rise. With a second major supply wave (following last years) due to hit seaborne markets in 2014 and displace a portion of domestic supply, the marginal ton price theory will be put to the test. At this stage no one appears 100% sure where that cost support will kick in as the market has never experienced such a massive amount of new supply in such a short time frame. But with spot prices falling to around $115/mt in early March, the market may find out soon.
Some inland mines and those owned by larger state-owned mills will continue to operate but grade depletion and the high cost of developing decent-sized mines in China means new capacity is unlikely to be material. Mines also need to meet certain environmental targets which will add to their production costs. Some analysts anticipate that roughly a third (more than 100 million mt/year on a 62% Fe basis) of domestic production will stop this year. Australian producers will have added almost double this amount over 2013 and 2014.
Steel Raw MateRialS Monthly iSSue 13 / MaRch 2014
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Steel RAW MAteRIAlS MONtHlY
Hancock Prospectings Roy Hill is possibly the last significant, low-phosphorous iron ore project in Western Australia and it is being taken increasingly seriously by analysts and other market observers. The Pilbara-based project could potentially reach long-term direct shipping ore production of 55 million mt/year over a 20-year mine life, output which many analysts are now including in their supply-demand models.
We werent including production from Roy Hill twelve months ago but we are now its obvious the project will go ahead, a Sydney-based analyst said, noting it would add to the iron ore supply wave over the next 4-5 years.
In a research note late last year, JP Morgan analysts forecast that production at the project would start mid-2016 with capacity likely to be reached some 12-18 months later. Roy Hill continues to say first ore will be delivered in September 2015.
Massive new supply from Fortescue Metals Group and Rio Tinto in particular over 2013/14, along with a slowing China and investor antipathy towards the resources sector, meant many analysts doubted the viability of Roy Hill. With long-run iron ore prices forecast to dip to $75-85/mt, the projects margins looked skinny if an all-in landed price of close to US$70/mt was accurate, they argued. The iron ore grade is expected to be 60-61% Fe, so there will be a discount to the 62% Fe index.