Interviewtimes 
– Ore prices have scaled a 10-year high on rebound in Chinese steel demand
Iron ore prices have shot up to record highs mostly due to a shortage of supply in China, where crude steel production has risen 30% in the past five years.
It’s hard to see what will cause benchmark prices to come to consensus $100 per tonne levels in the next 12-24 months unless China drastically cuts steel output – which seems unlikely since Q1 output rose 6% on-year – or global iron ore supplies rise significantly.
Steel prices and margins are rocketing in China, and reports of further reductions in supply due to environmental concerns are having a significant impact on iron ore prices. On April 25, China’s hot-rolled coil (HRC) margin reached a record $177.80 per tonne, according to Platts Global Indexes. HRC prices were Yuan 5,750 per tonne (or $888.50/tonne), marking an 8 percent increase.
Raw materials prices often trump steel prices, and steel prices trump raw materials prices.
It appears to be both. For the past several years, steel prices have been trending in the same direction as iron ore prices. However, unexpectedly this year, they decoupled. Why?
While steel prices rose, iron ore prices remained range bound, failing to benefit from rising steel prices. Although China’s iron ore imports were lower in 2018 than in 2017 (1,064 million tonnes versus 1,075 million tonnes), they were still more than sufficient in reducing steelmaking capacity as part of a supply-side reform agenda. Downstream, homebuilding activity has been exceptionally strong in 2018, driven by shanty town renovations, while Beijing’s “more aggressive” fiscal policy has seen more local bonds go towards infrastructure.
In China’s steel capacity swap program, strong steel prices from capacity removal encouraged the construction of new steelmaking facilities. As of 2019, China’s steel production capacity increased by 40 million tons per year, primarily through the replacement of existing steel production facilities which had been offline for several years. According to Platts Analytics, around 28 million tons per year of new capacity is expected to be deployed in 2021, although the pace was slowed in 2020.
Despite its booming steel sector, China has taken some steps to cool prices through discouraging the export of some raw materials and increasing imports of other feedstock alternatives. These steps have largely been viewed as short-term measures to calm prices.
However, there may be long-term implications as Beijing attempts to cut down on its reliance on Australian iron ore, the world’s largest steel producer.
Due to ongoing political and trade tensions with Canberra, Australia is the world’s largest steel-making ingredient exporter, meeting approximately two thirds of China’s metal import needs.
The Chinese Finance Ministry announced on April 28 that certain products – including pig iron, crude steel, recycled steel raw materials, and ferrochrome – will no longer qualify for a tax rebate on exports from May 1 all by waiving import duties.
That’s significant because the first quarter of this year saw China export 17.68 million tonnes of steel products, up 23.8% from a year ago.
In the event that Chinese steel products will be rendered uncompetitive in regional markets as a result of the removal of export rebates, the mills may reduce production as they will be reluctant to oversupply the domestic market and thus reduce prices and profit margins.
As the authorities were restricting exports, they also made steel imports cheaper. The steel could be used to substitute for iron ore.
Steel scrap, recycled steel, and pig iron aren’t direct substitutes for iron ore, but they can be used to make steel using electric arc furnaces.
Iron ore prices have more than doubled in the past 12 months, driven almost entirely by China.
Acccording to market analyst firm Macquarie, the spot market has the potential to hit $US200 a tonne, although it predicts actual prices of $US140 for 2020-21 and $US105 for 2021-22. NewSouth Bank estimates iron ore prices will slump to $US120 in the December quarter.
Demand for steel has increased due to strong global steel markets, where the US hot rolled coil price more than tripled over the last nine months. Meanwhile, the cost of iron ore has also risen by more than twofold in the past year, driven by China.
Macquarie forecasts that the spot market will trade at $US200 in 2020-21, although its actual forecasts are lower at $US140 for 2020-21 and $US105 for 2021-22.
Global steel markets are experiencing strong demand, with hot rolled coil prices more than tripling in the US over the last nine months, and nearly doubling in Germany and Brazil.
Closer home in India, taking cues from buoyant iron ore prices, steel companies have hiked hot rolled coil prices by ₹4,000 a tonne to ₹67,000 in May due to sharp increase in cost of production, amid the second wave of Covid-19 pandemic ravaging the economic activity.
In the same vein, the price of cold rolled product had soared by 4,500 a tonne, even as demand stagnated sharply in the last two months due to various restrictions imposed by States in an effort to contain the outbreak.
Iron and steel prices are still at a deduction of over 8,000 a tonne from the landed price of imports. China exports steel at $967 a tonne while it is $1,164 in Europe and $1,420 in the United States.
In mid-May or early June, steel companies may implement another price increase of up to 2,000 a tonne, sources said. Many steel-using industries have decried soaring steel prices affecting infrastructure projects.
