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Analysis: China Q1 steel output, prices supports iron ore

London — A number of steel and iron ore indicators have turned more bullish since March, with iron ore prices recovering over the past week.

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China's first quarter steel output growth was confirmed Tuesday, which manifested despite a series of winter mill bottlenecks mainly in northeast China to improve air pollution.

There was another rebound in steel mill margins too as flat steel prices won support after winter cut rebar demand may be helping shore up iron ore prices.

Brazil's Vale stressed Monday it would continue to cut lower margin iron ore output, while Australian miner Fortescue Metals Group managed to reduce discounts to benchmark IODEX fines imposed onto term contract buyers of Fortescue Blend fines and Super Special fines loading in May, compared to April sales.

Building expectations China may continue to make pollution-related steel cuts, helps demand expectations for higher grade iron ore and more seaborne imports of coking coals.



STEEL OUTPUT


China's steel output in Q1 rose to just over 212 million mt, up 4.5% on the year-earlier quarter, albeit against a period where steel production was under-reported last year owing to contributions from induction furnaces yet to close by the end of 2017.

The increase in crude steel output nonetheless was surprising.

"The production restrictions imposed during the winter months came to an end in mid-March -- that said, not all manufacturers had complied with the cuts, and production had already been expanded again beforehand," Commerzbank said in a note Tuesday.

March's crude steel output was equivalent to 2.386 million mt/day, up 2.9% from the daily average of January-February. However, China's pig iron output fell 1.1% on year to 60.64 million mt in March, according to National Bureau of Statistics data.

Traders and investors are focused on China's EAF steel making growth, and greater scrap consumption at blast furnace complexes as potentially growing substitutes for iron ore.

"Scrap supply is rising due to increased recycling and the closure of illegal induction furnaces, but scrap supply and demand remains tight given elevated blast furnace consumption," Jefferies analysts led by Seth Rosenfeld said in a note this week. The US investment bank sees a mixed picture for EAF growth in China, mainly on gas and power costs.


CHINA INDUSTRY


After a tour of China steel industry companies, Jefferies said it expects 2018 to see stable steel pricing-margins year-on-year, flat steel demand, steady steel mill utilization rates and stable-to-lower steel exports.

Steel mill closures and related measures are decelerating, but the bank sees a focus on pollution and quality control restrict steel production.

Global steel demand this year was lowered in the latest World Steel Association outlook, released Tuesday.

Worldsteel expects global steel demand will reach 1.6161 billion mt in 2018, down from its past estimate in October, which was 1.6481 billion mt for 2018.

In China, Worldsteel now expects 736.8 million mt in finished steel product demand, down form October 2017?s estimate of 765.7 million mt for 2018.

Steel mill spreads for flat steel exports in China rose further last month, and indicators are back at record levels seen in September 2017 as steel prices rebounded.

As flat steel prices moved higher, underlying iron ore costs and coking coal import costs fell last month and spreads remain strong even as iron ore recovered this week.

Iron ore import prices into China fell in March from an 11-month high, dropping to $69.70/ dry mt CFR China from February's $77.46/dmt CFR China. IODEX hit lows of $63/dmt in early April, and have since moved up, closing Tuesday at $64.45/dmt.

"Iron ore prices have returned to more realistic levels, the market could soon be confined to narrow, rangebound trading," said metals miner Eurasian Resources Group's CEO Benedikt Sobotka in an email last week.

The "value over volumes" strategy adopted by the major iron ore producers "should prevent iron ore prices plunging back to the lows of 2015," he said.

--Hector Forster, hector.forster@spglobal.com
--Edited by Maurice Geller, maurice.geller@spglobal.com