“Steel is going to drift a bit lower, but not collapse,” Citi research analyst Tracy Liao told delegates on Thursday October 31, “[and] iron ore will go quite a bit lower, whereas coking coal prices will go up.”
Liao said that while there has been slowdown in growth over the past two years in many regions, there was now an expectation, in advanced economies at least, to see a bottoming out in the first half of next year.
China, meanwhile, has had a strong performance in the real estate sector with low single-digit growth in real estate sales, she said, while in infrastructure - the second largest end-user sector for ferrous products - the year-to-date performance had been well below expectations and was struggling for growth.
The automotive sector, which consumes large quantities of flat steel, has been weak globally this year, she said, pointing to lower car sales in China, India and the European Union.
“It is a sector [that] is expected to have the most challenges over next two to three years,” she said, adding that while “we do expect China's auto sales to stop falling,” doubts remained over the chances of a strong rebound.
The downbeat automotive market has been most evident in European hot rolled coil prices, which have fallen consistently so far this year. Having started 2019 at €520-530 per tonne ex-works, they were down to €415-425 per tonne ex-works by October 30.
In China - where relatively low inventories reflect healthy demand - steel mills have, nonetheless, been struggling on steelmaking margins, “drifting to almost zero now,” Liao said. “They've not been making a great profit, but they are financially resilient,” she added.
However, she warned that, away from China, steel mill margin were still under a huge amount of pressure, resulting in companies “running flat, or at break even.”
In iron ore, Liao noted that it had been an eventful year so far in 2019, with supply disruptions resulting from accidents, maintenance and extreme weather events affecting major companies around the world and knocking out millions of tonnes of capacity.
But she said production and deliveries were now back on track, and the market was now likely to shift toward oversupply in the next two or three years.
Iron ore prices soared in the first half of 2019, with Fastmarkets’ iron ore 65% Fe blast furnace pellet index, cfr Qingdao, reaching a year-to-date high of $147.08 per tonne cfr Qingdao on July 5, up from $121.38 per tonne on January 4. Even so, Liao said the iron ore prices were not high enough to encourage much in terms of new capacity.
With the trend for prices to gradually drift down, the path ahead could be bumpy, Liao told delegates.
For coking coal, there was a different story, she said, because supply “does not have the same story as iron ore. There is a decent amount of capacity to return back to the market, which could put pressure on prices, giving it the opposite situations to iron ore.”
But Liao said that environmental issues and a lack of finance for coal projects, means that upcoming coking coal projects - those expected to start up over the next five to 10 years - were unlikely to result in large supply growth.
A higher intake of hard coking coal is predicted in China, where older, smaller furnaces are being phased out, replaced by bigger furnaces that require large amounts of hard coking coal, Liao said, adding that Australia was likely to be the only region that could grow its coking coal capacity over the next few years.
She predicted that iron ore prices will fall further next year, while coking coal prices could see some upside in 2020 before moving down in 2022.
A mixture of trends were forecast for steel, iron ore and coking coal prices in 2020 at the London Metal Exchange Ferrous Focus session this week.