Flash News! Update on U.S Coal, Mongolia & [lots of other things]

16 02 2010

I’ve been falling behind schedule but still let me update on recent posts in order to all keep you freshly informed.

Iron Ore. The survival of the benchmark system (i.e. annual price setting process) has been questioned since last year as painful negotiations has led the Chinese to purchase iron ore on spot markets. BHP Billiton has been pushing in favour of an overhaul of the benchmark system to better reflect spot prices and its chief executive Marius Klopper previously stated that the miner would not sign any new volumes to contracts set through annually produced pricing. BHP’s quest is gathering speed as Brazilian giant Vale also concurred saying it, too, was open to spot-market trading especially as spot prices are twice the current benchmark prices. In the interim, BHP has approached Japanese steel mills with the possibility to shift to quarterly pricing.

In the last steel update, I have reported on market research foreseeing a 40% increase in iron ore prices. It seem a 40% rise would only be a provisional arrangement and an annual price agreement, if any, would be closer to a 80% for the 2010-2011 delivery period.

Coal in the U.S. In the entry on the U.S. Budget proposal, I have warned of the backlash that the decision to repeal corporate income tax exemptions for the coal, oil and gas industries would unleash. Shortly after the publication of the Budget, Senator Jay Rockefeller of West Virginia complained about the inconsistency of such message regarding the future of coal and warned that this announcement could lead producers to reduce their output. He based his critique on the absence of wording related to other measures already established in support of coal production and recent US EPA action regarding mountain-top removal.

Mongolia. Last week the country cancelled the Tavan Tolgoi auction and decided to retain 100% of the deposit. As mentioned in a post in October, Tavan Tolgoi is the world’s largest undeveloped coal deposits. Intense pressures from China and Russia to acquire stakes in the deposits have influenced Mongolia’s decision. It has been reported that the company could be considering hiring a contract mining company to develop the deposit. The Tavan Tolgoi project has historically been considered too big for a single company to develop and mine. Still the Financial Times suggested Australian contract miner Leighton may be hired to develop Tavan Tolgoi while retaining full state ownership of the huge coalfield.

OSISKO has recently provided an update reserve and resource estimate for its Malartic project. This new estimate is based on the combined, previously-reported resources of the Canadian Malartic and South Barnat deposits. The resource estimated at 6.28 million onces in proven and probable reserves when I first wrote about Osisko has been increased to 8.97 million ounces which has for effect of increasing the mine life by 25%. The press release is available here.



27 01 2010

I am already falling behind with my new year’s resolution. I apologize for slacking. I started writing an entry last week but did not finish it. I got a hand on good market research from Exane BNP Paribas, as well as Nomura Market Research lately and I think that it is worth sharing the wealth.
Essentially, my entry seeks to tell you what to expect of steel in the near-term. Below is a summary principal driving factors for the steel industry.

Cost of inputs

Rising costs of inputs (iron ore and coking coal) has been the most important driver of steel prices lately. The market is sufficiently balanced at the moment to allow producers to pass these price increases to consumers.

Iron Ore

I was perhaps a bit too early to call iron ore contract negotiations in season a couple of weeks ago. After all, discussions and general signalling of intentions have started taking place only lately. Officials from the Chinese Iron and Steel Association kicked off the season with an exercise of out loud wishful thinking when they announced their expectations of a 20-30% rise in iron ore prices. Major iron ore producers would prefer starting negotiations with Japan to establish a price that will later be used as the basis of other negotiations. Doing this in 2009 has allowed them to resist Chinese demands for a lower price. (Interesting commentary here.)

Price Outlook. Analysts at Exane BNP Paribas, Citigroup and Nomura research are expecting that the price of iron ore would increase 30 per cent this year. Goldman Sachs JBWere is slightly more enthusiast as it was reported in the Australian media that it upgraded its iron ore outlook for this year to a 35- 40 per cent increase. Prices for 2011 are assumed to remain somewhat stable (Nomura Equity Research is forecasting an increase of 10% from 2010 levels).

Coking Coal

Steel mills are resuming production just as production cuts of coking coal (think Shanxi region) have taken place. Nomura Equity Research forecasted in an early December report that Australian hard coking coal would rise to 180$/tonne in 2010 and then to 225$/tonne in 2011. As for Exane BNP Paribas it expects a target for coking coal at around 200$/tonne in 2010. I would be tempted to think that these estimates are a bit low as Xstrata has made an agreement to provide some Chinese steelmakers for Q1 at USD 190$/tonne. Taking in consideration that some Australian producers of coking coal are already nearly sold out for 2010, it is fair to expect premiums to be paid to secure supplies.

As raw material prices rise, spot prices are rising faster than contract prices. Producers buying from the spot market (think smaller Chinese mills) will face steeper cost increases and could likely experience a tightening of supply as major iron ore producers have to redirect supply towards benchmark contracts rather than spot markets as restocking takes place in OECD countries.

Steel demand: Catch up vs Real Growth?

Last week signs of fiscal tightening in China have shaken commodity markets due to the widespread belief in Chinese stimulus measures being the main driver of the rally in commodities. Still, China remains an important source of demand as a result of its rapid economic development and urbanization. In 2010, the infrastructure budget of China is expected to grow 15% (from the previous year) and will effectively affect steel demand.

To complement this, many steel users in OECD countries have kept very low inventories in late 2009 and are expected to start restocking very soon. The impact of the US stimulus plan is also expected to be better felt this quarter although Buy American will largely limit the benefit to US mills. These factors lead many to think that even without a recovery steel purchases would be increasing.

However, this will not be enough to call it a recovery. A proper recovery in demand (beyond restocking) from steel users in the construction, car and real consumption is expected only next year. Some see the boom times of 2007 coming back in 2011-2012 although this seems a bit far fetched considering where the industry now stands.

Steel supply

Future supply growth is apparently constrained as high cost steel mills have been idled and capital expenditures slashed as a result of the downturn. In addition, producers in developed countries are sticking to a rather robust production discipline to privilege prices over volume. Still Nomura Equity Research expect capacity utilisation rates to rise from 60 to 70 per cent globally (projection excludes China) in 2010 and to then increase to a “normal” levels 80 per cent in 2011.

Chinese steel production outlook is a bit harder to assess. The country produces 47.5 per cent of global crude steel production. The Government is committed to solve its blatant overcapacity problem; however its grip on the steel industry is loosening as a significant segment of it is now under private control. Progress on that front has been modest has mills have been reluctant to comply.

The threat of Chinese exports flooding market has been the reason many North American and European steel producers did not increase their products’ prices in late 2009. However many analysts do not see Chinese exports as imminent threat. There are two reasons for this. First, production costs are rising faster for Chinese mills and as such prices between developed countries and Chinese products are converging. Secondly the very low inventories in North American and European markets, the longer lead times associated with the purchase of Chinese products may simply be unmanageable from a logistic point of view.

China cracks down on over capacity. World rejoices.

5 10 2009

China has announced this week that it would deal with over capacity with regards to steel, cement, aluminium, and wind power. At present China is only being mindful that the economic recovery is fragile and hopes to avoid the drastic factory closures and job losses that over capacity could lead to. China’s will to resolve this problem is not new and its pledge to attack the problem is only a reiteration of previous policy goals whose application have not always been consistent.

China’s industrial policy goal for the aluminium sector has for long aimed at consolidating around fewer greener and more efficient facilities while phasing out smaller inefficient smelters. Between 80 and 130 smelters, some of which with nameplate capacity of only 20 000 tonnes per year, are assumed to be in operation in China. The Cabinet repeated pledges announced in May to ban for three years new capacity and to remove small plants scaled at 800,000 tonnes per year or below, according to Reuters. Such a high threshold for nameplate capacity is surprising as no smelters with a capacity above 800 000 tonnes per year has been reported in China by Light Metal Age. A smelter above 800 000 of capacity can only be found in Russia and the Middle East. In sum, the meaning of the Cabinet statement is at best nebulous.

In the case of steel, China has decided to crack down on the 10 per cent output capacity that it deems illegitimate, It has also decided to no longer support new projects or expansion plans of current facilities. Not authorising new projects is not a guarantee that output will be reduced as some regions have illegitimacy approved construction as local authorities are not always following Beijing.

As the targeted industry sectors are energy intensive, the only affected party to China’s decision to reduce industrial output may be Australia who has been benefitting from China’s surge of coal imports. For the countries that have had to set up safeguards, impose corrective tariffs and file WTO cases, this comes as good news. Western steel mills restarting capacity are also benefitting from this move. So is Noranda who just restarted capacity at its Evansville smelter.