Metal Bulletins daily Fe 62% iron ore index has seen a bullish start to the year peaking on January 11 at $79.08 per tonne cfr Qingdao. This was followed by a short-term retreat to $72.88 by February 1, before a recovery to $78.43 by February 15. Prior to the prices fall, Chinese port stocks of iron ore had ballooned to an unprecedented level. Stocks amounted to 1.6 months worth of blast furnace iron production, which though seasonally depressed and constrained by winter production cuts, contrasts with an average of just one months worth of stocks historically. The high stock level finally fell in the week ended January 26, indicating that demand exceeded supply. It was stocks owned by mills that fell with traders stocks actually rising. However, the volumes held were so excessive that they are still likely to negatively impact new orders and prices in the spring.
Overall, a further boost in inventories this year would be countercyclical. Based on developments over the past decade, 2018 should be a year in which the industry takes stock and reduces their holdings, rather as in 2015 or 2012, as the chart above shows.
Although there is clearly a seasonal demand revival on course, whether it matches expectations is another issue. The winter iron output cap which took effect mid-November, is expected to last until Mid-March, but many market participants believe some form of restrictions may still remain in place after the proposed end time. However, it is not evident that these environmental protection policies will have an impact on actual crude steel output. Combined crude steel output in November and December 2017, in fact, rose by 3.9% year-on-year to 133 million tonnes. The provinces facing winter cuts were mainly in the north and included Hebei, Tianjin and Shanxi. Shandong in the East, the second largest steel producer after Hebei, was also affected. Although production in the provinces facing cuts fell by 6.4%, the drop was offset by other regions where crude steel output was raised by 11.4%.
Increased scrap consumption of Chinese material, both at home and abroad, has pulled scrap prices higher and to levels back above hot metal, making them increasingly uncompetitive at the countrys integrated mills. Without a dramatic drop in scrap prices, which we do not expect, it is unlikely that iron ore prices will come under too much pressure. As such, we maintain our forecast of only a small decline in benchmark iron ore prices during the next few months.
In the coking coal market, tight supply from Australian ports is easing and queuing times are getting shorter. The increased spot availability of vessels at the Dalrymple Bay Coal Terminal pushed down prices in the second half of January. Metal Bulletins index for premium coking coal, fob Australia, dropped from a peak of $258.79 per tonne on January 12 to find its floor at $209.64 on January 30, before rebounding again to $229.57 on February 15. Just like last year, this particular benchmark remains the most volatile of all steelmaking raw materials. With supply disruptions easing, most analysts are bearish for the next quarter, but there is a short-term upside risk to coking coal prices with the expected pick-up in demand after the Lunar New Year.
January also started on a bullish note for the ferrous scrap market, in particular in the United States and Europe. It was not until the second half of the month that the situation changed when the Metal Bulletin index for northern European HMS 1&2 (80:20) dropped from $366.99 per tonne cfr Turkey on January 17 to $334.93 on February 7. It then climbed to $344.42 on February 15, in tandem with other steelmaking raw materials markets. Scrap demand fundamentals remain strong amid rising steel output in Turkey, the EU countries and the US.
Analysis by Alona Yunda, Metal Bulletin Research
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