Iron & steel special: "up and down"

It’s been a week of high and low Fe content, with Goldman Sachs being firmly in the former. In fact it single-handedly returned positive sentiment back to commodities with a research note: “we now believe that the risk/ reward once again favours being long commodities. We are shifting back to a near-to medium-term overweight recommendation”.

At the other extreme was the FT’s Lex Column. It said that as long as China “continues its recent pace of development, its share of global steel demand will probably stay at around the current 45% (by comparison, it consumes only 10% of the World’s oil). In that case, the growth rate of global steel production could well stay at the 5% it has registered for the last decade. “The construction of Chinese infrastructure has lifted the global intensity of steel use to levels not seen since the post-War reconstruction of Europe and Japan ended in the early 1970s. That golden period was followed by two decades of minimal growth in global steel production – and dismal profits. “When China is built out, its steel demand should fall. Chinese producers, left with spare capacity, would then be tempted to export into an already well supplied world. That implies another bad decade or two for the industry”. For the record, the FT says that the World currently consumes nearly 0.034 kilogrammes of steel per unit of global GDP. This compares with nearly 0.036 in 1960 but as low as 0.022 in 1990. Food for thought.

Somewhere in between these two, is the inevitability of power cuts which will cause a fall in Chinese steel production. For example, Deutsche Bank says the shortage may reach 35 gigawatts or 3.7% of the Country’s capacity last year; and 35 gigawatts is enough to supply 35 million US households. In turn, this means that production has risen in the first four months of the year by 9.1%; and in the month of April China accounted for 47% of World steel output. As a result, Steel Market Intelligence says inventories are rising.

Of more concern is Mirae Securities view that China steel prices will fall 10% this summer. Similarly, spot iron ore prices have fallen 5.9% in three weeks to $173 at Tianjin; and this despite contract iron ore prices for Vale and Rio in Q3 expected to be little changed (i.e. as much as down 1.2% for Rio).

Back to the ‘highs’, though, Baosteel is doing its bit by finally winning planning permission for a new 10 million metric ton mill in Zhanjiang in Guangdong. As a result, too, some 15 million tons of obsolete capacity will be shut down. Baosteel also, enigmatically said it will seek to consolidate steelmakers in Guangdong; albeit no details are, as yet, forthcoming.

Finally Vale is not bearish (and nor am I) as it invests $2.9 billion to increase the capacity of the Ponta da Madeira terminal in northern Brazil, making it the largest port in the Country by volume. Similarly, Exxaro Resources, a South African coal miner, has made a rare bid ($129 million) in iron ore, with the target being the Aussie miner Territory Resources. This is part of Exxaro seeking to meet its goal of producing 10 million metric tons of iron ore a year. And, finally, Glencore continues to seek further off-take deals in iron ore and may well extend its agreement with London Mining in Sierra Leone.

“For every low there is an equal but opposite high” - Norman Cousins

HEADLINES

IRON ORE
• Vale will hold contract iron ore prices, while Rio dips, says Platts
• Iron ore prices fall 5.9% in three weeks to $173
• London Mining in talks with Glencore on iron sales
• Exxaro offers $130 million cash for Australian iron ore producer, Territory Resources

STEEL
• Steel inventories in China may be rising, says researcher Steel Market Intelligence
• China’s steel production rises 9.1% in first four months
• China’s steel output may fall from June as a resukt of inevitable power cuts, says Platou Markets
• Chinese steel prices to fall 10% this summer, says Mirae
• Baosteel expects to win approval for Zhanjiang Project in Guangdong this year
• FT’s Lex Column on steel and China: warns of possible contraction

SHIPPING
• Vale to spend $2.9 billion to set up Brazil’s largest port
• Capesize rents gain for a fifth day following speculation that vessels have been withdrawn