Spot stable. Paper too. Steel rebounded. Nothing burger.
Westpac has some good material on next year:
Three factors were behind the recovery in iron ore prices in 2018: 1) the restructuring of the Chinese steel industry and resulting lift in steel prices; 2) declining Chinese ore production due to the tighter implementation of environmental policies (China’s ‘war on pollution’) and; 3) the weak response of seaborne trade to higher iron ore prices.
Chinese steel production is on track to rise 7.5% in 2018 following a solid 4.3% gain in 2017. A lift in fi xed asset investment activity through 2018 boosted steel demand. Just as important has been the closure of smaller, less effi cient mills and a more general production shift towards larger more effi cient mills. Many smaller mills are not captured in the offi cial data. The reduction in steel capacity helped reduce steel inventories, supporting higher steel prices. With the remaining mills running at higher capacity rates, margins improved in the face of the surge in ‘reported’ steel production. However, there are signs that steel production may be peaking (Westpac’s forecast for 2019 is broadly fl at at –0.3%). Chinese net steel exports have risen four months in a row which, along with a 10% drop in Chinese steel prices since mid September, suggests demand is already softening. Production is set to follow soon as prices continue to fall.
Chinese domestic iron ore producers face signifi cant challenges in meeting stricter environmental policies. Many miners cannot comply with the regulations and/or meet the associated costs, resulting in mine closures and declining production. Production in Hebei, where mines have a poor environmental record, has fallen 20% year to date. Total Chinese ore production is on track to fall 39% this year. Westpac is forecasting ore production to stabilise through 2019, though falling a further 5% in year average terms.
Chinese ore imports moderated in 2018. Australian supplies largely tracked sideways while Brazilian exports lifted just 3% from the same period last year. More recently, derailments in the Pilbara disrupted Australian exports but more generally, miners’ focus on value over volume has seen ore production lag planned output. Westpac is looking for imported ore to grow 1–2% in 2019 with the increase coming from both Australia and Brazil.
Moving through 2019, steel production is expected to slow and falling prices will narrow steel mill margins. At the same time, iron ore supply is set to expand with some stabilisation in Chinese output and a lift in seaborne supply. The net result is our forecast 20% correction in ore prices through 2019 with spot 62%fe trading around US$54/t cfr by year end (year average US$58/t).
Robust Chinese steel production has been supportive of met coal prices but so too was the lift in demand for higher quality met coals due to Chinese steel reforms and the ‘war on pollution’. With many mills relocating to southern coastal regions this has increased the appeal of imported met coal. Chinese met coal has responded modestly to higher prices but the overall supply response is more restrained with little to no new investment in recent years while recent Australian mine closures have reduced potential supply. Ongoing maintenance to Australian rail and port capacity, plus recent bushfi res closing some rail lines, has further tightened the market. Current spot prices are high which is a strong incentive to bring on new supply but with greater ambiguity around the net impact of Chinese winter closures this year. So while Chinese steel production is to soften in 2019, risks to Australian rail supply remain and met coal demand has been sound despite high prices. As such, Westpac has upgraded its 2019 forecasts with hard coking coal moderating from US$191/t currently to US$174/t from a previous estimate of US$155.
Roughly right. I’m a bit more bearish given the big fade in Chinese data which will take stimulus much of the year to reverse and the advance of scrap.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
