Bulk Commodity Analytics & Research - Market Compass

Iron Ore:

Arrivals of iron ore cargoes in China capitulated w/e 25^th April, allowing 62% Iron Ore Fines prices to punch a hole through our US$190/t CFR China target-peaking at US$193-194/t on 27^th April.

Chinese BF capacity utilization rates have continued to rebound, now above 90%, and those in need have returned to stock up from local ports, resulting in higher daily off takes as expected.

Prices spurred by higher BF capacity utilization rates, higher daily off takes, and reduced arrivals of iron ore cargoes .N.B.  – denotes degree of importance (*low, ***high)!

Market trying to digest impact of steel export tax rebate reduction (see Steel) and removal of import tariffs, on some secondary steel raw materials (see Ferrous Scrap), on iron ore consumption.

Offshoring excess domestic steel output i.e. exports should have a net-net impact on global iron ore demand as Rest of the World need to fill this short to medium term steel supply vacuum.

Those Chinese mills that can no longer export steel will either retool towards more profitable steel products or permanently blow out their furnaces – helping govt meets its agenda.

Short Term Outlook:

We calculate iron ore supply-demand balance has tightened over the past week, though fundamentals do not justify a US$180-190/t CFR China level.

Australian iron ore shipments have increased markedly over the past two weeks, which should transpire into higher arrivals volumes into China w/e 9^th May.

“Hot money”, speculative funds, high steel prices& margins will be key determining factors for iron ore prices, maintaining short-term target at around US$190/t CFR China.

Medium Term Outlook:

We believe increasing BF capacity utilization will counterintuitively undermine iron ore prices, as greater steel output, particularly for long steel, squeezes inflated mill margins & costs.

We still anticipate a significant rebound in Australian and, to a lesser degree, Brazilian iron ore shipments through Q2, maintaining medium-term target of US$160-180/t CFR China.

Update Risks:

Rest of the World and Chinese stimulus-driven blast furnace output rebounds faster than expected, paring, or even exceeding, anticipated increase in Q2 iron ore production volumes – probable.

Fallout from Rio Tinto’s Juukan Gorge incident and renegotiation of Land Access Agreements provide some uncertainly around progress of mine replacement programmes – possible.

Downside Risks:

Brazil achieves significant reduction in COVID-19 infection rates enabling local iron ore miners to raise domestic production – possible.

China enforces strict blast furnace capacity restrictions, prompting end-users to source steel supply from seaborne markets – improbable.

Ferrous Scrap:

While peaking Turkish COVID-19 infection rates prompted the govt to impose fresh national lockdowns, Turkish steel mills appear unaffected and undaunted by the new measures.

Local steel output supported by robust consumption from Turkey’s “Mega Projects” and incredibly well-diversified export portfolio (bars & rods) – Israel, Yemen, HK, USA, SG, Peru…

The anticipated flurry of Turkish ferrous scrap bookings again failed to materialize, though intermittent purchases have been sufficient to push prices towards US$450/t CFR Turkey.

With domestic rebar prices where they are, we calculate there is still a minimum of US$18/t up for grabs for bulk ferrous scrap suppliers.

Regarding China’s removal of ferrous scrap import tariffs, we see this as a non-event – at present – given that quality has been, and will be, the highest barrier to entry.

For China to import any material volumes of steel scrap, there will need to be greater tolerance for relatively lower import grades i.e. shredded.

Removal of import tariffs will improve Chinese demand for higher grades (P&S, HS etc..), though it will take time to reverberate through the supply chain given the availability of these tonnes.

We maintain May-July will be a strong period for Turkish steel consumption and output, particularly rebar, in response to peak construction of commercial buildings and utility projects over this period.

Short Term Outlook:

Turkish EAF Rebar-Scrap spreads narrowed to US$158/t on 30^th April, meaning mills could accept US$18/t increase in production costs, maintaining Short term target of US$465/t CFR Turkey.

Medium Term Outlook:

The longer 62% Iron Ore Fines prices remain above US$170/t CFR China, the greater the pressure builds for ferrous scrap use and on prices, maintaining medium-term target of US$501/t CFR Turkey.

Upside Risks:

Robust hot metal production costs, particularly for iron ore, increase the competitiveness of ferrous scrap, prompting EAFs and BOFs to increase consumption and usage rates – probable.

Turkish mills suppress seaborne ferrous scrap benchmarks creating infrequent arbitrage opportunities for Chinese buyers – probable.

China imports large quantities of ferrous scrap thru 2021 which leads to a domino effect of tightening the overall supply-demand balance – possible.

Downside Risks:

Central Bank governorship and interest rate policy potentially becoming more “dovish” i.e. lower interest rates for longer , resulting in further depreciation of Turkish Lira – probable.

Peaking Turkish COVID-19 infection rates prompt the government to impose a fresh national lockdown (paid out), impacting construction of commercial and utility projects (improbable).

Steel:

Chinese steel export tax rebates and import tariffs on steel raw materials was the “elephant in the room” last week.

Key Facts: In 2020, approx. 61% (32.7Mt) of China’s total steel exports (53.7Mt) were flat-rolled alloyed, carbon, and stainless-steel finished products – slightly higher (65%) in Q1 2021.

We believe this will be the playbook for 2021:

Buyers who need Chinese flat-rolled alloyed, carbon or stainless finished steel products will pay up, leading to higher ex-China prices and eventual Rest of the World supply response later in the year.

In China, two things will happen, excess flat-rolled steel production will subdue prices and margins, prompting those who can, to retool towards more profitable long steel e.g. billet, rebar etc…

Those who cannot eventually cut production once the economics aren’t viable or the government targets them as part of its “crackdown” on heavy industry – whichever comes first.

That aside, blast furnace capacity utilization rates up last week and have peeped above 90% for the first time in a few months – the supply response is coming…

Short Term Outlook:

Benchmarks remain supported as national inventories again depleted at a faster pace than they can be replenished, maintain short-term target at RMB5, 400-5,500/t (US$832-848/t) EXW Shanghai.

Medium Term Outlook:

Healthy margins encouraging an immediate supply response right now, but this will take time to feed thru to national S&D – maintain medium term target at RMB4, 500/t (US$690/t) EXW Shanghai.

Upside Risks:

Government forces steel mills who can no longer viably export steel or retool to produce alternative steel products to shut up shop – probable.

Non-sophisticated SHFE retail investors continue to overreact to fresh news of capacity reforms & restrictions – probable.

India’s COVID-19 outbreak afflicts domestic steel production and exports, tightening global steel supply chains further –probable.

Domestic stimulus-driven steel consumption, particularly for long products, expands at a much faster pace through the remainder of the year – possible.

Downside Risks:

China reduces or cancels steel export tax rebates (paid out) resulting in increased domestic availability of flat-rolled products, limited impact on long products (bars & rods) – probable.

Government eases stance on emissions targets sooner rather than later, allowing latent steelmaking capacity to service robust consumption – probable.

Rebounding Australian iron ore production & shipments remove support from hot metal production costs & steel prices the second quarter – possible.