Australian commodities – December quarter

Steel and steel-making raw materials

Robert New

Economic recovery in many major consuming countries has led to an increase in demand for steel, and therefore steel-making raw materials. Government investments in steel-intensive infrastructure and recovering consumption of consumer durables, supported by government stimulus and improving consumer and business sentiment, has prompted many steel producers to restart mills idled in late 2008 and early 2009. Demand for steel is expected to continue to grow over 2010, further increasing demand for iron ore and metallurgical coal — Australia’s two largest commodity export earners.

Summary of announced blast furnace restarts, excluding China
region	restarted capacity
	million tonnes per annum (mtpa)
Asia	15.4
CIS	5
Eastern Europe	4.3
North America	7.3
South America	8.3
Western Europe	21.3
Total	61.6
Source: Macquarie 9 October 2009.

World steel demand to recover from a decline in 2009…

In 2009, significant idling of steel-making capacity early in the year, associated with the global economic slowdown, is estimated to result in an 8 per cent decline in global steel production, to 1.2 billion tonnes. Lower production in OECD economies is expected to be partially offset by an estimated 14 per cent increase in China’s production. Over the past few months, some idled production capacity has been restarted and, in line with assumed improvements in world economic growth, global steel production is forecast to increase by 10 per cent to 1.4 billion tonnes in 2010.

…and Chinese steel production to maintain growth in 2010

In China, government infrastructure investment is expected to continue through 2010, resulting in strong domestic demand for steel. While robust consumer and business sentiment will support domestic demand for consumer durables, the effect could be offset to some extent if the Chinese Government chooses to tighten domestic credit growth, as widely reported by media. Assumed economic recovery in China’s major export markets, including the United States and Western Europe, is also expected to lead to an increase in steel-intensive exports. On balance, China’s steel consumption is forecast to increase by 9 per cent to 527 million tonnes in 2010.

World steel outlook
	2007	2008	2009	2010
Crude steel consumption (Mt)
European Union 27	221	215	161	169
United States	114	103	77	79
Brazil	25	25	22	24
Russia	47	48	45	48
China	427	452	484	527
Japan	86	82	66	68
Korea, Rep. of	56	59	53	56
Chinese Taipei	22	23	19	21
India	55	60	60	65
World steel
consumption	1 332	1 347	1 226	1 309
Crude steel production (Mt)
European Union 27	210	198	145	157
United States	98	91	59	71
Brazil	34	34	27	31
Russia	72	69	63	65
China	489	502	571	617
Japan	120	119	89	104
Korea, Rep. of	51	53	43	50
Chinese Taipei	20	20	17	20
India	53	55	55	62
World steel
production	1 344	1 330	1 230	1 351

Steel consumption in OECD economies forecast to increase in 2010

In 2009, total steel consumption in the United States, the European Union and Japan is estimated to decline by 24 per cent to 304 million tonnes. In 2010, steel consumption in these major economies is forecast to increase by 4 per cent, to 316 million tonnes, in response to the assumed recovery in economic growth. However, consumption in 2010 is still forecast to be 21 per cent less than 2008 consumption.

In the United States, activity in the manufacturing sector declined sharply in late 2008, but gradually stabilised during the first half of 2009. More recently, there have been signs of further improvement in US manufacturing activity, which has provided support for an assumption of modest growth in 2010. Reflecting this assumption, US steel production in 2010 is forecast to increase by 20 per cent to 71 million tonnes. While this forecast represents a substantial increase from the estimated production of 2009, it remains around 22 per cent below production achieved in 2008.

In Japan, capacity utilisation in the steel industry has increased since mid-2009, after a significant decline in late 2008 and early 2009. While steel production in Japan is forecast to rise in the next 12 months, it is unlikely to reach full capacity. Japanese steel production is forecast to increase by 17 per cent to 104 million tonnes in 2010.

Strong steel production to support iron ore demand

Reflecting higher expected steel production, demand for iron ore is forecast to increase in 2010. World trade in iron ore is forecast to increase by 8 per cent to 987 million tonnes in 2010, compared with an estimated rise of 2 per cent in 2009. The main contributors to increased import demand are likely to be China, Japan and the European Union. However, import volumes to most countries, with the exception of China, are forecast to remain well below those of 2008.

Outlook for world iron ore trade (Mt)
	2007	2008	2009	2010
Iron ore imports
European Union 27	170	161	118	128
Japan	139	140	109	124
China	383	444	572	618
Korea, Rep. of	46	50	39	45
Chinese Taipei	16	15	13	15
World imports	830	895	913	987
Iron ore exports
Australia	267	309	360	394
Brazil	269	282	267	295
India	94	101	80	65
Canada	28	28	25	27
South Africa	30	33	40	42
Sweden	19	18	19	21
World exports	830	895	913	987

In 2009, China has provided significant support for an otherwise weak iron ore market. China’s imports of iron ore are estimated to increase by 29 per cent to 572 million tonnes in 2009, reflecting increased steel production and lower domestic iron ore production. Imports of iron ore by China are forecast to increase by 8 per cent to 618 million tonnes in 2010. This slower forecast growth for Chinese import demand reflects an expectation that some domestic production capacity, which was shut down in late 2008 and early 2009, will restart during the next 12 months.

Imports by OECD economies, such as the United States, the European Union and Japan, are expected to increase in 2010. Higher steel production is forecast for these major OECD economies, largely in response to the effects of government stimulus packages on manufacturing activity and consumer demand for durables.

Higher production from major exporters in 2010

The majority of import demand growth is expected to be captured by Australian and Brazilian iron ore exporters, reflecting their relative cost competitiveness compared with other producers. As such, production in these countries is expected to be at, or close to, capacity throughout 2010.

Australian iron ore exports are forecast to increase by 9 per cent to 394 million tonnes in 2010, when significant additional production and export capacity is scheduled for completion. Rio Tinto’s Brockman 4 and Mesa A projects are expected to provide an additional 47 million tonnes of capacity, CITIC Pacific’s Sino Iron Project is expected to add 28 million tonnes, and BHP Billiton’s Rapid Growth Project 4 is expected to add 26 million tonnes. These capacity expansions will provide support for production and export growth in 2010, with the full effect expected to reach beyond 2010.

Brazilian iron ore exports are forecast to increase by 10 per cent to 295 million tonnes in 2010, reflecting a return to close to full production capacity. Vale, Brazil’s largest producer of iron ore, idled significant capacity earlier in 2009 because of weak demand, particularly from the European Union. An improved outlook for iron ore demand, particularly from China and the European Union, has prompted Vale to restart idled production capacity since mid-2009.

In 2010, Indian exports of iron ore are forecast to decline by 19 per cent to 65 million tonnes. While production of iron ore is expected to increase, this is expected to be more than offset by increased consumption by domestic steel producers. Exports from Canada, South Africa and Sweden are all forecast to increase in 2010, although the rates of increase are forecast to be relatively low.

Metallurgical coal demand to increase in 2010

Despite a significant increase in China’s metallurgical coal imports, world trade, in volume terms, is estimated to decline by 10 per cent to 215 million tonnes in 2009. The improved economic outlook for major import markets, and continued strong demand from China are forecast to result in world metallurgical coal trade increasing by 8 per cent to 232 million tonnes in 2010.

Before 2009, China was largely self-sufficient in metallurgical coal, with production primarily in the central north and north-western areas of the country. A significant decline in international freight rates (increasing the competitiveness of imported coal) and lower domestic production, particularly in Shanxi province, led to an increase in demand for imported coal. For 2009 as a whole, China’s imports of metallurgical coal are estimated to be around 34 million tonnes. In 2010, the restart of domestic production capacity is likely to reduce, to some extent, demand for imported metallurgical coal. China’s imports of metallurgical coal are forecast to be around 27 million tonnes in 2010.

Australian exporters have captured a significant share of China’s imports, accounting for around 70 per cent in the first three quarters of 2009, up from a 20 per cent share in 2008.

The restart of steel-making capacity in other important metallurgical coal importing markets, such as the European Union, Japan and the Republic of Korea, is expected to further support import demand for metallurgical coal in the short term. In 2010, imports of metallurgical coal are forecast to be around 51 million tonnes in the European Union (a rise of 16 per cent from 2009), 50 million tonnes in Japan (a rise of 6 per cent) and 22 million tonnes in the Republic of Korea (an increase of 16 per cent). Despite these forecast significant increases, the total imports by these three major consumers remain 10 per cent below that achieved in 2008.

Outlook for world metallurgical coal trade (Mt)
	2007	2008	2009	2010
Metallurgical coal imports
European Union 27	56	56	44	51
Japan	54	57	47	50
China	6	7	34	27
Korea, Rep. of	23	24	19	22
Chinese Taipei	8	6	6	6
India	22	29	25	28
Brazil	10	11	9	11
World imports	227	238	215	232
Metallurgical coal exports
Australia	138	135	135	145
Canada	26	27	21	24
United States	29	39	29	34
Russia	10	16	15	17
World exports	227	238	215	232

Improved outlook for metallurgical coal producers

Increased metallurgical coal exports from Australia are expected to contribute to more than 50 per cent of the forecast growth in world trade in 2010. Higher exports are expected to occur in response to rail and port expansion in the Goonyella system. In mid-2009, the Dalrymple Bay Coal Terminal capacity was expanded to 85 million tonnes a year. In late 2009, rail capacity in the Jilalan Rail Yard system was upgraded to 130 million tonnes a year. It is assumed that this new system capacity will be fully operational in early 2010.

As demand increases over the course of 2010, a number of producers with relatively high costs are also expected to increase production. Reflecting this, total exports from North America are forecast to increase by 16 per cent to 58 million tonnes in 2010.

Canadian exports of metallurgical coal are forecast to increase by 14 per cent to 24 million tonnes in 2010. Teck Cominco, which accounts for the majority of Canadian coal production, increased production in the September quarter 2009. Previously planned temporary shutdowns were cancelled or reduced in length to meet increased demand. Similarly, exports of metallurgical coal by the United States are forecast to increase by 17 per cent to 34 million tonnes in 2010.

Australian exports

In 2009-10, Australian iron ore production is forecast to increase by 20 per cent to 425 million tonnes. This reflects the ramp up of capacity at Rio Tinto’s Hope Downs operation, continued growth in production at Atlas Iron’s Pardoo DSO operation, and higher production volumes from BHP Billiton operations, despite tie-in activities associated with the Rapid Growth Project 4.

Despite higher production volumes, Australian export earnings from iron ore are forecast to decline by 15 per cent to $29 billion in 2009-10, primarily as a result of lower contract prices for Japanese Fiscal Year 2009 (JFY, April 2009 to March 2010). Lower contract prices and an assumed appreciation of the Australian dollar against the US dollar is expected to more than offset the effect of a forecast increase in export volumes.

Australian export earnings from metallurgical coal are forecast to decline by 39 per cent to $22 billion in 2009-10, despite export volumes being forecast to increase by 21 per cent to 151 million tonnes. Lower contract prices and the assumed higher value of the Australian dollar are the major contributing factors to this forecast decline in export earnings.

Iron ore and steel outlook – Australia
				2007-08		2008-09		2009-10	f	% change
Production
Iron and steel s		Mt		8.15		5.57		7.19		29.1
Iron ore		Mt		324.7		353.0		424.7		20.3
Metallurgical coal		Mt		139.4		130.5		156.4		19.8
Exports
Iron and steel		Mt		2.13		1.74		1.92		10.3
–  value		A$m		1 562		1 363		1 177		– 13.6
Iron ore		Mt		294.3		323.5		388.8		20.2
–  value		A$m		20 511		34 234		29 097		– 15.0
Metallurgical coal		Mt		137		125		151		20.8
–  value		A$m		16 038		36 770		22 338		– 39.2