Takeaways from Singapore Iron Ore Forum 2016
OREANDA-NEWS. Yesterday saw miners, traders, steel mills and financial institutions come together for Singapore Iron Ore Forum 2016, engaging in lively discussion on the global iron ore and steel industry outlook. Please see below our ten key takeaways from the event.
1) Optimism on China’s broader economic rebalancing
Although industrial growth has been slowing (in 24 of the last 25 quarters), strong growth in the services sector – which now accounts for more than half of national GDP – will increasingly fill the gap, and industrials data is becoming increasingly misleading as a barometer for the broader economy. The Renminbi is no longer considered undervalued, and the economy is also becoming less trade-orientated with exports/imports reducing relative to GDP. Tax reforms and liberalisation measures are also expected to benefit the services sector. With the current rebalancing expected to help sustain economic growth, China’s contribution to global growth should reduce moving forward as the country becomes relatively less trade-orientated. Meanwhile, probability of a debt ‘crisis’ materialising in the near-term was considered low.
2) Views remain divided on ‘peak steel’ in China
Views among producers and consumers remain largely divided on the longer-term steel demand outlook. Major international miners anticipate further growth over the coming decade, albeit at slowing rates, while Chinese industry associations estimate that demand has already peaked. BHP Billiton highlighted that China’s accumulated steel stock per capita still lags developed economies (currently approximately 50% of U.S. levels, and forecasting a gradual rise to 90% by 2030), and that the country will still need more steel to sustain its economic growth targets.
3) Scrap consumption to rise over the next decade
There was relatively greater consensus on higher scrap consumption in China over the longer-term. CISA noted that accumulated steel output will exceed 10 billion tonnes this year, providing a huge reserve of scrap. Significant growth in obsolete scrap over the next decade is expected to lead to greater substitution for pig iron in the steelmaking process. Over time, this should result in a gradual decoupling of pig iron and crude steel production growth rates, translating to relatively lower demand for iron ore.
4) Positivity on iron ore lump demand
China is expected to follow global trends towards larger, more efficient and environmentally-friendly blast furnaces, which will require higher quality material for greater operational efficiency. Other supportive factors for lump premiums include (i) increased environmental regulation, and (ii) declining domestic concentrate production. As a result, Chinese lump demand is expected to outperform total iron ore demand. For more on SGX Iron Ore Lump, see Iron Ore Lump – Differentiation Matters and Iron Ore Lump – Off to a Fine Start.
5) Iron ore cost curve continuing to flatten
The strong cost-cutting drive continues among the major miners. BHP Billiton’s C1 cash costs have declined by around half over the past three years, broadly in line with other producers, as a result of both controllable and non-controllable factors. The combination of an industry race to the bottom of the cost curve coupled with around 180 million tonnes of estimated low-cost supply growth between 2016-2020 is expected to lead to a further flattening and decline in the cost curve in the years ahead.
6) Near-term market volatility to persist
Most participants agreed that volatility may remain high in the near-term. Year-to-date, Chinese steel demand has benefited from government stimulus in the form of lending and support to property and infrastructure, which may persist in the near-term. That said, the steel industry remains in structural oversupply, generating uncertainty over sustainability of higher steel prices. At current price levels, Baosteel estimated that 70-80% of Chinese mills are able to produce at a profit, indicating the recent surge in crude steel output may be sustained in the near-term, which is counter-productive to government aims to reduce industry overcapacity.
7) Derivatives are improving price formation
International iron ore derivatives are increasing the sophistication of price formation in the industry. The combination of rising adoption of physical spot platforms and development of the SGX iron ore derivatives market are both enhancing transparency and providing deeper price references, as the market evolves towards increasingly real-time price discovery.
8) Chinese steel exports to remain high
Chinese steel exports have annualised at over 110 million tonnes in the first four months of 2016, up 8% on the prior year. Fast-growing exports in recent years have helped mitigate the Chinese steel industry from domestic demand weakness. Most participants forecast exports to remain high over the medium-term. In the face of rising trade frictions and anti-dumping duties, CISA noted that protectionism by nature harms consumers and is against the spirit of international trade, while Baosteel added that the Chinese steel industry has become highly competitive as an industry.
9) Coking Coal - India to become main driver of the seaborne market
CRU estimated that China’s import demand for coking coal will be sustained at around 40-50 million tonnes, in spite of strong domestic output growth in recent years. As the average size of blast furnaces increases, it will require more high-CSR coal (while domestic resources generally have high sulphur and low CSR). In the longer-term, India – which relies more heavily on imports for its coking coal requirements – is likely to become the main driver of seaborne demand growth. While more supply closures are required to rebalance the seaborne market, relative to iron ore, coking coal has less growth expected in the years ahead, with CRU asserting that coking coal fundamentals are one step ahead of iron ore in the cycle.
10) Removal of iron ore export duties to help Indian iron and steel industry?
While India used to be one of the three main global iron ore exporters last decade, the country became a net importer in 2015. India’s Ministry of Steel targets annual crude steel production of 300Mt by 2025 (versus about 90Mt today), which would require approximately 400Mt of iron ore. In spite of measures to reduce exports of raw materials so as to use domestic resources domestically, sharper reductions in seaborne iron ore and steel prices left the industry struggling to compete with the international market. FIMI is lobbying the government to remove export duties (as was done for low-grade ore).