Will the steel market bears bite back in 2017?

Consensus forecasts suggest iron ore delivered into China will average around $55-$60/dry mt this year, following the surprise upside seen in 2016 when prices finished up over 80% and averaged at $58.45/dmt CFR.

Last year prices were bolstered by higher than anticipated Chinese demand and lower than expected supply growth from majors, as well as buoyant sentiment from firm steel and iron ore futures trade at various times in the year.

The cost-push from coking coal also filtered into iron ore, particularly higher grades, as mills looked to maximize direct charge material and reduce sintering/coke usage. Higher input costs translated into firmer steel prices, which perpetuated raw materials strength.

As a result some see iron ore prices rising further in 2017. The Metallurgical Mines Association (MMAC) of China forecast average seaborne prices will move above $60/dmt CFR on marginally better demand and relatively stable production – domestic concentrate supply will fall around 10 million mt, according to MMAC.

Citigroup forecast an average iron ore price of $56/mt CFR in 2017 and $48/mt next year, while Morgan Stanley forecast $58/mt CFR both this year and next. Goldman Sachs sees iron ore prices above $60/mt CFR in the first half of 2017, before falling to $55/mt by the end of the year.

This year Chinese steel output could come under pressure as ongoing trade measures further close the export valve amid a continued contraction in domestic consumption.  While exports moderated last year, this was primarily on square bar as mills in Turkey and elsewhere opted to use scrap, with electric arc furnace-based production much more competitive than the integrated route. With Southeast Asia now looking to reduce Chinese imports, following actions in the US, Europe and elsewhere, exports could fall across the board.

The stronger dollar could also impact emerging market demand and Chinese exports, although it may just make Chinese steel cheaper in dollar-denominated terms depending on the yuan’s performance.

Nevertheless, China’s exports are only 10% of its output, so it is fair to say production and capacity will be more determined by domestic demand and consumption than external trade barriers. On the domestic demand-front, many in China suggest they are seeing a pipeline of infrastructure investment pretty much unchanged from last year. However, the property picture does not look so rosy, with a number of local governments recently moving to constrain price growth and restricting funds to developers, which could mean lower sales growth/steel demand by the end of H1.

Beijing’s sharper environmental focus – if it continues – could also constrain steelmaking. At present, the government appears to be targeting induction furnaces, with media reports suggesting it is setting their complete elimination as the cornerstone of its structural reforms.

S&P Global Platts is forecasting no change to Chinese steel production this year, with it remaining around 813 million mt, and a decline of around 1% in domestic demand.

Any fall in blast furnace-based steel output could weaken coal and ore buying, hitting prices at a time of rising supply; given the recent bull-run mining minnows in Australia and elsewhere are looking to restart/increase production, while more ore from Roy Hill is likely to come to market.

BHP and Vale’s Samarco mine could restart this year, while Vale will bring on additional supply from its S11D mine in northern Brazil. S11D will have a nominal capacity of 75 million mt/year and be at the lower end of the cost-curve, with C1 cash costs below $10/mt.

Coking coal prices are likely to continue trending lower, and have already shed over $100/mt from the $310/mt FOB Australia peak seen in November. Receding raw materials will likely see Chinese mill margins contract – since the global financial crisis of 2008 higher costs have been the main source of steel price strength – and export offers fall into markets still open to Chinese product.