Brief Outlook - SteelGuru
Iron Ore – Seaborne iron ore prices remain bearish as buying activity remained sluggish due to several Chinese mills taking maintenance shutdowns and provinces enforcing strict output cuts to meet Beijing’s goal of keeping 2021 crude steel production flat to 2020 levels. Market insider see prices correcting to USD 120 per tonne but there is apprehension that if USD 120 is breached, prices may fall below USD 100
Coking Coal - The current rally still has legs, with prices in China still trending up. There are already bids from China at closer to USD 500 per tonne CFR levels for prime low-vol, and that leaves an arbitrage of USD 150. So, it’s conceivable that Australian FOB could very well go to above USD 350 per tonne levels.
Steel Making Cost – While iron ore prices have slid by about USD 90 per tonne, coking coal prices have surged by USD 210 per tonne. Therefore the impact on steel making cost is only USD 24 per tonne for a pure play steel maker without own mining resources
Iron ore – USD 90x1.6= (-) 144
Coking Coal – USD 210x0.8 = (+) 168
But for Indian primary BF-BOF based steel mills, which are dependent of imported coking coal and source iron ore domestically, while the cost of coking coal for one tonne of steel has gone up by USD 168 or INR 12000-13000 per tonne since May 2021, cost of iron ore for one tonne of steel has come down by INR 1500x1.6 or INR 2400 per tonne, resulting in erosion in sky rocketing margins in Q3 as compared to Q1 & Q2
Contrary to earlier expectations of strong recovery in steel demand in pre festive season, Indian steel sector has remained bearish in September so far as steel mills are unable to hold on to prices of rebar, HR, CR & coated set in month beginning as retail prices are weakening due to limited demand and liquidity crunch. The steel demand of HR & CR is also hit as several automakers have curbed production due to ongoing semiconductor shortages.
However, Chinese buying led resurgence in billet has helped some Indian steel mills to book large volumes at USD 620-625 FOB, up by almost USD 30-40 per tonne, propping their sentiments and expectations that festive season led buying of goods will result in strong recovery in steel demand in the country in October-December 2021.
With daily reported COVID19 cases in India remaining at about 30K per day, the threat of wide spread outbreak resulting in disruption in recovery is starting to look unreal
In the global steel market, there are signs that supply has caught up with demand and that the supply-demand balance is becoming more neutral. The market seems to be getting back to normal in terms of lead times, prices, etc. We are now in a period where things have to get back to normal, which in fact may be different from where it all started. A price range higher than the beginning of the fourth quarter of 2020 will probably be the new normal. On the other hand freight rates are still incredibly high. The slowdown in the Far East has dealt the market a strong body blow.
China’s restrictions on steel production at 2020 levels will mean stronger Chinese demand for semi-finished steel imports driving prices up.
Demand in the US is high, but supply seems to be catching up with the demand in this market as well. There are still some shortages, especially on the West Coast. However, it is difficult for imports to fill the demand shortages due to shipping constraints. With the erratic and historic high shipping prices, most mills prefer to offer on FOB basis. Importers who buy on FOB basis on all occasions are in for a surprise when cargoes are ready to ship. To add to the problem, most ports are full and do not wish to receive more cargoes. Especially for rain-sensitive cargoes, indoor storage space hardly exists. With all these high prices, credit has become an issue for importers. Hardly any buyers have full credit to insure the receivables. The protected markets will continue enjoying their positions until the measures in question are terminated.
Freight is a major factor nowadays. Even for the traditional routes, freight rates have lost touch with reality. Traders have been punished by the high and unpredictable freight costs and are now careful as regards new business. No one wants to book on FOB basis. It is getting more and more difficult to get a quotation, which makes it difficult and/or risky to offer on CFR basis as well. This situation will create short-term downward pressure on prices and long-term shortages in importing countries. Regionalization is the current trend as sea freights are exceptionally high.
Although the number of Covid cases is still high and we are again entering the season of colder weather in the northern hemisphere, the post-pandemic rebound and reopening are continuing despite setbacks due to the Delta variant of the coronavirus. The vaccination process will surely allow us to continue with our daily lives and so demand should continue.