Steel input costs hold up
21 February 2017
Following China’s return from its New Year holiday there were expectations that raw material costs for steelmaking might well slide. While coking coal costs have declined to around US$175/tonne, iron ore prices have risen to above US$90/tonne.
By 15th February FOB prices for premium hard Australian coking coal were around US$175/tonne, a fall of 22% since the beginning of 2017, with further signs
of weakening. However, the price remains around US$100/tonne higher than this time last year.
Increased spot trading may stabilise the price, particularly as China’s National Development and Reform Commission (NDRC) is reported to be considering
reapplying an annual limit on coal mining operations. In April last year it applied a 276 operational days annual cap on coal mining, which helped
to trigger the rapid increase in seaborne coking coal prices. In November the restriction was relaxed to 330 operational days per year but as seasonal
demand now wanes over-capacity as well as pollution appear to be key concerns for the government. China also reportedly refused a 16,000 tonne shipment
of coal from North Korea, on the surface a response to the test firing of a ballistic missile contrary to international sanctions, but perhaps an easy
gesture given concerns on coal supply.
Seaborne 62%Fe iron ore to Qingdao has increased in cost since the New Year, rising above US$92/tonne. Chines port inventories are reported to have fallen
to around ten days supply although demand from mills is said to be lacklustre. The cost increase runs contrary to pre New Year forecasts, with speculation
on Chinese futures markets still apparently a factor. The NDRC has again implored major Chinese steel makers to increase production of high-grade steels,
particularly for construction and infrastructure, supporting future demand expectations. High quality imported ore is required for higher grade steels
and also improves productivity for more modern mills.
Less capacity more output
A Greenpeace commissioned report has confirmed that China’s productive steel capacity actually increased in 2016 by more than 36 million tonnes. The report,
carried out by Custeel, reckons 85 million tonnes of annual capacity was shut down last year, but only 23 million tonnes of that was actually in operation.
Ten Chinese provinces increased their steel making capacity, with 75% of the net increase in capacity in Hebei, Shanxi and Tianjin surrounding smog-plagued
Beijing. Only six provinces reduced capacity, mainly in the southwest of the country. The China Iron and Steel Association has forecast that net capacity
will increase further in 2017 because of already approved new steel projects coming on stream. The publication of the report has triggered angry media
accusations of cheating on China’s part, and is likely to fuel demands for stronger European and US trade defence measures on steel products.
Outlook for steel
Nippon Steel & Sumitomo Metal, Japan’s largest steelmaker, told Reuters it expected Chinese steel prices to sustain until at least the autumn, when
the Communist Party Conference is held. Nippon Steel reported it had sought steel price increases of more than US$170/tonne in fiscal 2016-17 and expected
to apply further increases from April this year.
In Europe, the Deutscher Scraubenverband January raw material cost analysis for boron alloyed and unalloyed steel wire rod, showed the first and very sharp
uptick since 2011. The graphs indicate that fastener manufacturing material costs rose to their highest since the beginning of 2012.
In December Taiwan’s China Steel Corporation announced average across steel grade increases of more than 12% for the first quarter 2017. It has not yet
announced its pricing strategy for April onwards.
The fall in coking coal costs will, however, result in lower second quarter contract prices for steel makers. Iron ore costs are still general assessed
by analysts as being too high to sustain in the longer term. Analysts MEPS believe that steel prices are reaching their peak, but predicts that steelmakers
operating blast furnaces, despite facing downward market price pressure, may be able to increase margins as lower input costs should outweigh any decline
in steel prices.
