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Crops |
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Livestock |
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Energy |
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Metals |
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| Steel and steel making raw materials |
Rohan Kendall |
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| The outlook for steel and steel-making raw materials has deteriorated in the past three months. The global financial crisis has led to a decline in investment and consumer spending in the world’s largest economies. In particular, the United States, the European Union and Japan are now in recession and economic growth in China has slowed. Consequently, global construction and manufacturing activity, which is the primary end use for steel, has weakened. The weakening world steel market has reduced global demand for iron ore and metallurgical coal, Australia’s two largest export earners. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Steel | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| World steel prices have declined markedly since August 2008. The global financial crisis has reduced construction activity worldwide, which is the largest end use for steel. In addition, global demand for steel intensive manufactured products such as motor vehicles and whitegoods has weakened significantly. Output from these sectors is being scaled back and, consequently, steel demand is weakening. World steel consumption is estimated to have grown by 2 per cent in 2008 to 1.35 million tonnes. Consumption is declining in the United States and European Union where the effects of the financial crisis have been most severe. In contrast, steel consumption growth in China for 2008 is estimated to have been around 6 per cent. In 2009, assumed economic contractions in the United States, European Union and Japan are expected to lead to a further decline in steel consumption in these economies. On the other hand, in November 2008, the Chinese Government announced a US$586 billion stimulus plan primarily aimed at infrastructure construction and the reconstruction of parts of Sichuan province following an earthquake in May. This stimulus package is expected to contribute to steel consumption in China increasing by around 7 per cent in 2009. Steel consumption in India is also expected to increase in 2009 because of ongoing investment aimed at improving India’s power generation and transport infrastructure. Increased government spending and an easing of monetary policy by G20 nations will also provide support for steel consumption in the second half of 2009. Overall, world steel consumption is forecast to grow by 1.8 per cent in 2009 to 1.37 million tonnes. The fall in steel prices has led to substantial production cuts throughout the world. For example, Corus, Europe’s second largest steel producer, announced it will produce 30 per cent less steel than planned between October 2008 and March 2009. Severstal reduced production at its steel plants in the Russian Federation, North America and Europe by around 30 per cent in October. In China, a group of steel mills in northern China (Shougang Steel, Hebei Iron and Steel, Angang Steel and Shandong Iron and Steel) announced production cuts of 20 per cent in late 2008. In India, JSW Steel has temporarily shut 20 per cent of its capacity until steel inventories return to normal and the Japan Iron and Steel Federation has called on Japanese steel producers to reduce output to support steel prices. Global steel production declined year on year by 12.4 per cent in October 2008, following a fall of 3.2 per cent in September (the first year on year declines since December 2001). Reflecting these announced production cuts, world steel production is estimated to have increased by only around 1 per cent in 2008. This compares with growth of 7 per cent in 2007. In 2009, world steel production is forecast to grow by 1 per cent. Steel production is forecast to decline in large producing regions such as Japan, the United States and Europe, reflecting assumed weaker economic activity and reduced steel demand. Steel output in China is forecast to grow by 6 per cent in 2009 as activity in the construction and manufacturing sectors picks up. |
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| Raw materials | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substantial increase in iron ore prices in JFY 2008… | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contract price negotiations for the 2008-09 Japanese financial year (JFY, April 2008 to March 2009) resulted in the largest price increases to date for Australian iron ore and metallurgical coal. Iron ore contract price negotiations between Australian iron ore miners and Asian steel mills resulted in prices rising by 79.88 per cent for iron ore fines and 96.5 per cent for lump ore for JFY 2008-09, an average increase of 85 per cent. This was the largest price increase for both iron ore fines and lump, eclipsing a price rise of 71.5 per cent for fines and lump in 2005. These prices are fixed until the end of March 2009. There has been one example of steel mills defaulting on iron ore supply contracts. In early November, Mt Gibson announced three of its customers had defaulted on binding offtake agreements. These defaults forced Mt Gibson to enter into supply agreements with alternative steel mills at a price of US$40 a tonne, which is approximately US$50 a tonne lower than the JFY 2008 iron ore fines contract price. While these defaults represented a very small proportion of Australia’s iron ore exports and will not have a material impact on Australia’s export earnings, the new prices agreed to by Mt Gibson indicate downward pressure is likely to emerge for the contract price negotiations for JFY 2009. |
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| …but a large fall expected for JFY 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| There are several factors indicating a large fall in iron ore contract prices could occur for JFY 2009. First, steel production cuts in the second half of 2008 have significantly reduced demand for iron ore. The fall in iron ore demand is evidenced by the fall in the spot price of iron ore from almost US$200 a tonne in mid-2008 to US$70 a tonne in November. Given the assumed decline in world economic growth in 2009, it is likely the spot price will remain weak in the short term, placing significant downward pressure on contract prices which will be negotiated in early 2009. Second, exchange rate movements are an important determinant of the contract prices, which are settled in US dollar terms. The majority of Australian iron ore is sold to China, Japan and the Republic of Korea. Because the value of the US dollar has increased significantly against the currencies of Australia, China, Japan and the Republic of Korea, there will be significant downward pressure on the negotiated prices (in US dollars) for JFY 2009. Third, Australian iron ore producers achieved a larger price rise than their Brazilian counterparts during the 2008-09 negotiations. This was mainly because of the freight advantage of shipping ore from Australia to Asia compared with Brazil to Asia, which had increased considerably. Since August 2008, freight rates have fallen substantially and Australia’s freight advantage has narrowed significantly. As a result, the portion of the price relating to the freight rate differential is likely to be removed from contract prices for Australian ore in the upcoming negotiations. |
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| Metallurgical coal prices triple for JFY 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contract prices for most types of metallurgical coal tripled for JFY 2008, rising to around US$300 a tonne for premium hard coking coal. Factors contributing to the increase included strong global demand for metallurgical coals associated with growing steel production at the time of negotiations and supply difficulties resulting from congested Australian coal export infrastructure and heavy rainfall in Queensland during the March quarter 2008. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Large fall in metallurgical coal prices expected | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| A substantial fall in metallurgical coal contract prices for JFY 2009 is likely. Contributing to the expected decline in metallurgical coal prices will be weaker demand because of steel production cutbacks, increased availability of metallurgical coal from Australia, following the Queensland floods in early 2008 and the appreciation of the US dollar against many international currencies including the Australian dollar and the Japanese yen. There have been no reports of defaults on metallurgical coal contracts. However, with substantial steel production cuts underway, there have been reports of steel mills requesting metallurgical coal shipments be delayed. |
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| Iron ore producers reducing output and exports | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| World iron ore exports are estimated to have increased by 6 per cent in 2008. Global steel production cuts in late 2008 have led to miners reducing iron ore production and shipments during late 2008 and into 2009. As a result, world iron ore exports are forecast to remain largely unchanged for 2009 as a whole. In three leading iron ore exporting countries — Australia, Brazil and India — producers have implemented cuts to production and exports. In October, Brazilian miner Vale, the world’s largest iron ore producer and exporter, announced it would be reducing its annual iron ore production by 30 million tonnes (around 10 per cent) from November 2008. In Australia, Rio Tinto announced it would reduce its output by 20 million tonnes in the December quarter of 2008 and BHP Billiton is expected to reduce shipments from the Pilbara in the December quarter 2008 by around 6 million tonnes. Exports from India have also fallen sharply in the past few months. A combination of export taxes and inefficient infrastructure means the cost of exporting iron ore from India is much higher than from Australia or Brazil. Indian exporters primarily supply the Chinese spot market and the significant decline in the spot price over the past few months has led to a sharp reduction in exports from India. Given the forecast weaker demand, iron ore exports from India are likely to decline further in 2009. Greater competition in export markets is also likely to contribute to lower Indian exports, as both BHP Billiton and Rio Tinto have indicated their intention to increase supplies to the Chinese spot market. China’s iron ore production in the first nine months of 2008 increased year on year by 19 per cent. Growth in China’s iron ore production is expected to decline in 2009 as lower forecast iron ore prices will lead to high cost producers closing mines or reducing production. |
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| Metallurgical coal | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| A forecast decline in steel production in major metallurgical coal importing countries is expected to result in world metallurgical coal trade remaining flat in 2009. Japanese and EU imports of metallurgical coal are forecast to decline by 6 per cent in 2009. Offsetting this forecast decline will be expected higher import demand from the Republic of Korea and India as a result of increased steel production in these two countries. In volume terms, Australian metallurgical coal exports, which account for around 60 per cent of global metallurgical coal trade, are estimated to have achieved little growth in 2008. This is because of floods in Queensland’s Bowen Basin early in the year, which forced the temporary closure of a number of mines, and congestion in Australia’s coal supply chains, particularly in relation to port and rail infrastructure in New South Wales and Queensland. Australian metallurgical coal exports are forecast to remain flat in 2009 because global steel production cuts have reduced demand for metallurgical coal. High cost suppliers in the United States, Canada and the Russian Federation increased output during 2008 in response to significant price increases. Metallurgical coal producers in these countries are expected to reduce output (and exports) in 2009 in response to an expected substantial fall in metallurgical coal prices. |
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| Lower Australian dollar to support increased iron ore and metallurgical coal export earnings |
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| For 2008-09, significant rises in iron ore and metallurgical coal contract prices for JFY 2008 and a sharp depreciation in the Australian dollar are expected to lead to substantial increases in Australia’s iron ore and metallurgical coal export earnings. However, given the significant changes to the global economic outlook, there have been reports of contract defaults, production cutbacks and requests from overseas buyers to delay shipments of iron ore and metallurgical coal. There is a chance further shipments will be delayed or cancelled, increasing the risk to this outlook. For iron ore, an average 85 per cent rise in US dollar denominated contract prices and a sharp depreciation in the Australian dollar are expected to offset a decline in the spot iron ore price and lift export earnings by 52 per cent to around $31 billion in 2008-09. For metallurgical coal, a tripling of US dollar denominated metallurgical coal contract prices and a sharp decline in the Australian dollar are expected to lead to metallurgical coal export earnings increasing by around 150 per cent to around $40 billion in 2008-09. |
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