Iron ore and steel forecast and analysis for Q1 2016

Each quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – The Sucden Financial Metals Reports, Jan 2016.

Below is the iron ore and steel report, to download a PDF copy of the full report covering all the metals in pdf form click here.

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Iron ore and steel – Little to be bullish about until…

Iron ore prices have slumped – stockholders in China have been destocking because there seems no end to the oversupply while producers cut costs into the price sell-off and new capacity is ramped up. Steel prices are under pressure – demand is weak, especially in China, and raw material input costs are falling. Regional trade restrictions should turn regional prices more diverse – lower imports will lift steel prices in the US and Europe, while oversupply in the rest of the world keep prices under pressure. The low iron ore so far has been $38.30 per tonne. Prices may need to fall to $30 to prompt sufficient output cuts to rebalance the market, with prices then settling around $40.

Iron Ore Chart - 62 percent CFR Tianjin 2006-15 - FastMarkets metals report Q1 2016 Iron ore table - Chineses iron ore required to balance the market

Overall trend – Iron ore prices continue to trend lower in an oversupplied market. The combination of weak steel demand, the commissioning of new low-cost capacity while existing high-cost production is reluctant to close – since producers first attempt to cut costs – and destocking into the weakness are all negatives for the price. Unless demand starts to recover soon, these trends are likely to send prices even lower until more cuts are made. This may well lead to an overshoot on the downside while producers delay cutting output but steel producers destock; still, a restocking rebound is likely to follow at some stage in 2016. The outlook for steel demand is focused on China. There are concerns that Chinese growth will remain weak in 2016 but we feel the government’s plan for the ‘One Road One Belt’ projects will move from the planning stage to the building stage, leading to a pick-up in order flow. The investment project has been described as the world’s single most ambitious infrastructure plan, which in itself implies it is will be commodity-intensive. Perhaps this is the writing on the wall for a recovery in demand.

Iron ore supply to fall in 2016 – Low iron ore prices should trigger a net fall in supply but, with new production still being ramped up and with most of the iron ore majors expected to keep raising output until the end of the decade, more output cuts will be needed until demand recovers. Higher-cost producers in China and non-Chinese producers, other than the iron ore majors, must either cut costs or production or do a combination of both. At $40 per tonne, an estimated 30 percent of global iron ore production is loss-making so there is considerable room for further cuts to offset the new and cheaper production coming on stream. In 2013, some 400 million tonnes of Chinese iron ore were needed to balance the global iron ore market; this has now fallen to around 184 million tonnes. We expect cuts to be forced on Chinese producers and non-tier-one non-Chinese producers alike.

Steel output still falling – Global steel production in the first 11 months of 2015 was down 1.7 percent on the same period of 2014. Chinese production fell 2.1 percent in that period, with output in November off 1.6 percent.

So despite the continuing sell-off, with HRC prices in Asia off 30.7 percent in the first 11 months compared with the same period of 2014, production is only marginally lower. With demand remaining weak for now and with input prices still falling – scrap prices are following iron ore prices lower and lower oil prices are also reducing producers’ costs – steel prices seem likely to fall further until the outlook for demand improves. When that happens, restocking is set to provide a boost. With anti-dumping measures likely to proliferate, especially against China, we would not be surprised if North American and European price rebound first. But as the chart below shows, these are price series that have been dropping the fastest since the summer. Imports into Europe are likely to slow not only because of possible anti-dumping measures but also because the weaker euro makes imports more expensive. In the US, a stronger dollar could make imports more attractive but, given the 30-percent price falls this year, anti-dumping legislation should lead to a drop in imports.

Structurally the iron ore market looks bearish but it may be wrong-footed by China – With the iron ore majors intent on continuing to ramp up low-cost output, it looks as though iron ore prices are set to stay below $50 for a considerable time. Still, restocking cycles, once prices have stopped falling, could well produce significant short-covering rallies. But even if these are seen, we doubt iron ore prices will hold above $50 for any length of time. What the market needs is a halt to the slide in economic growth in China, which we feel may well start in 2016 once orders for the ‘One Road One Belt’ projects start to be placed. Given how bearish the market has become over China, we would not be surprised if the market is caught off guard in 2016 and that short-covering/restocking starts, which should lift iron ore and steel prices off current lows. In Q1, we expect a $35-45 trading range.

Steel price chart - regional steel prices - FastMarkets metals report Q1 2016

Steel prices continue to trend lower in all regions, with prices accelerating lower again in North America and Europe while falls in Asia have slowed. We expect recoveries in North America and Europe because we foresee the introduction of anti-dumping measures.

Iron Ore chart - Expected changes in iron ore exports 2013-16 - FastMarkets metals report Q1 2016

Low iron ore prices are the result of a combination of turf wars between the iron ore majors and the slowdown in China’s growth while it undergoes a structural change. The industry’s pain may well prompt China to buy foreign iron ore producers cheaply.

Iron Ore chart - movement in forward curve - FastMarkets metals report Q1 2016

The iron ore swap forward curve has flattened as it has dropped, suggesting the market expects prices to stay low for an extended period.

Steel chart - Global steel output and 12 month moving average - FastMarkets metals report Q1 2016

Global steel output continues to fall but, given the drop in price, it is surprising output has not fallen further. Lower production is not going to help iron ore prices, however.

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