Steelmaking raw materials set for volatile year amid deluge of uncertainties: 2022 preview
China’s road to decarbonization caused quite a stir in the steelmaking raw materials segment in 2021, and market participants expect more uncertainties in 2022
Fastmarkets summarizes the key factors to watch throughout 2022:
Decarbonization to ease Australian coking coal tightness
A coking coal trading source in India said that current steel prices in China were cooling off and coke prices were also easing as part of its decarbonization effort.
The source expects coking coal availability in the fob Australia market to improve in the first quarter of 2022 barring extreme weather conditions – such as cyclone season over the quarter ending in March - in Australia’s coking coal hub of Queensland.
Stringent controls on steel production
A Hebei-based industry analyst believes that the Chinese government will continue to pay attention to the iron ore and steel market during the decarbonization progress and will control overall crude steel production in 2022.
In the second half of 2021, it was clear that the Chinese government was limiting the annual production volume of crude steel to be at a similar level with 2020, but actual production volumes for 2022 remained uncertain, the analyst said.
A market source from Hangzhou said that the policy to control 2022 crude steel output might continue to impact steel supply but believes that crude steel production will mostly track the actual downstream demand in the first half of 2022.
Beyond the first quarter of 2022, if China sticks to its decarbonization plans and keeps its steel production levels below or at the same levels as 2021, then prices for iron ore are likely to be subdued and there will be no chance of price levels reaching the all-time highs of the first half of 2021, a Singapore-based iron ore trader said.
“There is no positive factor for an increase in iron ore demand, but the downstream building sector typically prompts strong demand for steel in the quarter ending in Jun. That may support [the] iron ore demand and prices if there are no other obstacles, such as the Omicron variant,” a Beijing-based trader said.
The Winter Olympics effect
Market sources believe that the iron ore demand in the first quarter of 2022 will likely remain bearish because of the upcoming Winter Olympics. Demand may recover in the second quarter of 2022 because of the seasonal increase in demand for steel products.
Some market participants are hopeful that steelmakers might resume steel production in the first half of 2022 - without additional production limitations - leading up to the Winter Olympics in north China.
A coking coal trading source in Hebei province anticipates the demand for seaborne coking coal, especially for premium hard coking coal, to be weak in north China before the 2022 Winter Olympics ends in late February.
Demand will most likely improve after the sporting event and should remain supported during the second and third quarters of 2022, before demand cools down in the fourth quarter, the source estimated.
Production restrictions for steel mills in north China will likely be lifted after the Winter Olympics, and seaborne coking coal demand will likely increase. The same trading source also believed that the authorities will help the property industry to sustain economic growth, supporting steel demand.
Iron ore prices for 2022 will likely average below 2021 levels. In the near term, however, prices are not likely to fall below $90 per tonne cfr China, according to Fastmarkets research during the recent Middle East Iron and Steel conference held on December 8 in Dubai.
The year-to-date average for Fastmarkets’ calculation of the index for iron ore 62% Fe fine, cfr Qingdao was at $161.42 per tonne, up $52.39 per tonne (48.1%) from $109.03 per tonne in 2020. Fastmarkets’ calculation of the year-to-date average for the 65% Fe Brazil-origin fines, cfr Qingdao index was at $186.98 per tonne, up $64.67 per tonne (52.9%) from $122.31 per tonne in 2020.
Fastmarkets research also shows that domestic coal and coke prices in China will remain high due to the ongoing ban on Australian coal imports.
The year-to-date average for Fastmarkets’ calculation of the index for hard coking coal cfr Jingtang was at $307.17 per tonne, up $183.16 per tonne (147.7%) from $124.01 per tonne in 2020. Fastmarkets’ calculation of the index year-to-date average for premium hard coking coal, cfr Jingtang was at $339.74 per tonne, up $197.64 per tonne (139.1%) from $142.10 per tonne for the previous year.
The year-to-date average for Fastmarkets’ index for hard coking coal fob DBCT was calculated at $190.96 per tonne, up $85.67 per tonne (81.4%) from $105.29 per tonne in 2020. The index year-to-date average for premium hard coking coal, fob DBCT was calculated at $222.60 per tonne, up $98.84 per tonne (80.1%) from $123.46 per tonne for the previous year.
An iron ore futures company from Shanghai found that if steel demand increases amid positive signals of a loose loan policy in the real estate industry in the first half of 2022, demand for mid-to-high grade iron ore products will be supported, increasing iron ore prices.
“In a recent economic conference held in China in mid-December, several key points were laid out pertaining to the countries efforts to focus on providing affordable housing in China,” a Singapore-based trading source said.
The same trading source believed that the Chinese government’s involvement in the real estate market will help to drive up demand for steel products like rebar. Iron ore will is likely to be indirectly impacted.
Uncertainty around Covid-19
The evolution of Covid-19 and its impact on the supply chain remains uncertain, according to a second coking coal trading source in Hebei province.
A Xiamen-based trading source said that while the Omicron variant may be less deadly than the Delta variant, there were still too many uncertainties around the virus.
The same trading source added that the Chinese government will continue to take strict measures to contain the virus from spreading in its communities.
Geopolitics, government policies to be the key driving force behind sentiment
China-Australia political tensions prompted iron ore prices to hit all-time highs just before the end of the first half of 2021, but prices began to reverse after cues from the Chinese government to curb steel production emerged in July.
China’s unofficial ban on Australian coal – including coking coal - is another major uncertainty; whether the ban will be lifted remains unknown, sources told Fastmarkets.
Several sources in China believe that it is difficult to predict whether and when the country will resume imports of Australian coking coal, and the country might continue to seek out cargoes from either its domestic suppliers or alternative sources.
A coking coal trading source in Singapore said that seaborne premium hard coking coal fob prices have been largely inflated in 2021, but he believes that the high prices will continue into the first quarter of 2022 because of the tighter Australian coking coal supply prompted by La Nina.
The same coking coal trader believes that the coking prices are likely to normalize downward after the first quarter of 2022.