The commissioning of new iron ore capacity combined with a dearth of disruptions to supply have boosted availability of cheap iron ore, which has weighed on prices. In most regions, steel prices have remained low because raw material prices have fallen and competition between steelmakers remains active. The exception is North America where disruptions to steel production and pent-up demand that has built up following weather-related issues in the first quarter have sent prices significantly higher. Still, this has opened the window for imports, which are likely to weigh on prices before too long.
Overall trend – Iron ore prices continued to slump in the second quarter, reaching a low of $89 per tonne in June after a low of $105 in the first quarter; they have, however, held above the spike low of $86.70 in 2012. This suggests that there is a floor in the market just below $90. As of early July, prices had started to recover - they were last seen at $97 after buyers took advantage of the dip to levels that are likely to be unsustainable. Steel prices have generally been weaker in Asia, edging higher in Europe and strong in the US, although more recently steel prices in the US have been slipping because high prices run the risk of attracting imports.
Iron ore in surplus but market still needs Chinese material to balance market – Although there has been a surge in iron ore supply as expansions are ramped up, the market will still need some high-cost Chinese iron ore to balance the market, which should provide a floor price. An estimated 200 million tonnes of Chinese ore will be required. While higher-cost Chinese capacity is closed, the marginal costs for the industry as a whole will shift lower. Although marginal costs are seen around $110 for China, lower cost producers would have costs closer to $80-90 if the higher-cost producers close. This means iron ore prices may well stay in a lower range around $90-$115 for longer. There is a risk that buyers may continue to destock into this price weakness but we also feel bargain hunting will encourage restocking by those that have already destocked.
Overcapacity and lower raw material prices keep steel prices capped – Steel capacity in China is thought to be around 960 million tonnes per year; the country produced 780 million tonnes in 2013. Utilisation rates are therefore running around 80 percent, down from 90 percent before the financial crisis. With so much idle capacity, steel prices are likely to remain price-elastic and the ability to export should mean global prices remain somewhat capped. US steel prices have managed to rise and for now concerns about anti-dumping law suits are deterring the free flow of exports to the US but imports are likely to pick up while the price differential remains large.
Demand outlook improving – Demand for steel is recovering and the global manufacturing PMI numbers look encouraging, especially for the developed economies. But until the gap between capacity and demand shrinks, demand is unlikely to have a big an impact on prices. Steel and iron ore are likely to remain buyers’ markets. There are likely to be regional price fluctuations but competition between steel producers at the regional and global levels is likely to keep prices in check.
Supply outweighs demand – Surplus iron ore production, with more low-cost capacity on the way, is set to keep steel prices low - lower raw material costs keep production costs low for producers, which in turn encourages more competition.
HRC steel prices in North America have managed to hold above prices in other regions because production outages created tightness. Stronger domestic demand has also been a positive factor, although high prices are attracting imports, bringing prices back from earlier highs.
Given the weakness in raw material prices, it is somewhat surprising that steel prices have not fallen further. Although global demand is set to recover and China looks somewhat stronger, we feel that demand-pull effect on prices will be limited because supply will remain price-elastic.
The forward curve in US HRC prices, as traded on Comex, is in a backwardation in the nearby months. This portrays a belief that prices may well be weaker down the road, which seems quite likely given the fundamentals. But producers may try to keep their current margins if raw material prices recover.
Global steel output in the first five months of 2014 was up 3.5 percent on with the same period of 2013. The EU has been one of the strongest areas with growth of 5.3 percent, followed by 4.4 percent in Asia, while production has fallen in Eastern Europe, the CIS and South America.
Source: fastmarkets.co
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