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The recent announcement about Vale’s resumption of operations in Brazil, along with new concerns about a slump in demand because of heavy rainfall in China, has resulted in the end of the iron ore price rally. There has also been pressure from tight steel spreads, with the operating margins for Chinese steel mills shrinking and now trending downward after initially reviving from a February low.
The upside support to iron ore prices has come from concerns that the present slackness could prove temporary. This is understandable. Chinese blast furnace operating rates were above 94.5% in the latest survey, and iron ore port stocks remained at three-year lows. But domestic iron ore production in China has been rising for the past two months, which could ease some of the dependence on expensive seaborne cargoes and provide further downside price risks.
We have previously detailed how, in the coking coal market, the focus has shifted from tighter supply, which supported prices earlier in the year, toward demand-side issues for major suppliers such as Australia and the United States.
One of the reasons behind the weakness of coking coal prices in recent months has been weaker demand in markets other than China due to the spread of Covid-19. These include India, Brazil and Europe. Another key import market for coking coal is Japan, which we look into in this week’s tracker.
Japanese demand has also been subdued by the pandemic’s spread, but before that, coking coal imports had shown signs of recovery, and we expect them to continue to revive once the market recovers from the Covid-19-related restrictions, amid the increasing price-attractiveness of seaborne coals.
After trending downward since 2016, Japan’s imports of coking coal showed a year-on-year increase in the first four months of this year, reaching 23.22 million tonnes.
In the bellwether scrap market of Turkey, the landscape may be changing this year, following the introduction of the new quota system for steel imports into Europe. The new quarterly EU quotas will limit Turkish steel producers’ ability to move large volumes into Europe in such a concentrated period, compared with last year, and may result in Turkish scrap purchases being spread more evenly over the coming 12 months.
We expect Turkish scrap prices to fall in the coming month, while the announcement of the change in EU finished steel import safeguard measures should damp scrap buying, after it being reasonably healthy recently.