abare.gov.au - Australian commodities – March quarter . volume 16 . number 1 2009

Steel and steel-making raw materials

Outlook to 2013-14

Rohan Kendall

The outlook for steel and steel-making raw materials (iron ore and metallurgical coal) is mixed. In the short term, global steel production and consumption is forecast to decline because of the global economic downturn. However, over the medium term, the outlook for steel and steel-making raw materials is positive, being underpinned by China and other emerging economies’ ongoing industrialisation.

Steel outlook

Over the outlook period (2009–14), growth in global steel consumption is projected to average 3.4 per cent a year, to reach 1.6 billion tonnes. However, this overall growth in steel consumption masks differences in the short and medium-term outlook and regional performance.

In the short term, world steel consumption is expected to decline as a consequence of the global financial crisis. Economic growth in OECD economies is assumed to begin recovering in 2010 and, combined with strong economic growth in developing countries, should ensure global steel consumption experiences robust growth in the second half of the outlook period.

Developing countries to drive steel consumption growth

Growth in world steel consumption over the outlook period is expected to come mainly from China, India, and to a lesser extent, Eastern Europe. Compared with the OECD region, emerging economies have relatively low steel consumption per capita and demographics which are more favourable for rapid growth in consumer spending and construction activity.

In the short term, steel consumption growth in emerging economies is forecast to be weaker than what has been achieved in recent years. The severe contraction in consumer spending in OECD economies has reduced demand for steel intensive goods, many of which are manufactured in developing countries. On the other hand, short-term steel consumption growth in developing countries should be supported to a large extent by investment in infrastructure such as railways, roads, pipelines, ports and electricity supply. For example, 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 2008.

Over the medium term, steel consumption is expected to grow rapidly in developing countries, particularly China. Factors such as urbanisation, industrialisation and favourable demographics which have supported strong growth in steel production and consumption over the past five years remain in place. Investment in urban infrastructure will remain a key driver of steel consumption in emerging economies. In addition, the size of the working age population is expected to expand rapidly. People of the working age demographics are more likely to purchase cars, household appliances and housing. Consequently, as the populations of China and India increasingly move toward being of working age, demand for these goods, and therefore steel demand, is expected to rise.

Over the medium term, steel consumption in China and India is projected to each grow by around 7 per cent a year.

Weak steel consumption growth in developed economies

Steel consumption in OECD economies such as the United States, Europe and Japan is expected to decline sharply in the short term. Recession in these economies is expected to lead to lower consumer spending on steel intensive manufactured goods, such as motor vehicles and appliances, and reduced construction activity, which is also steel intensive. For example, according to the US Bureau of Economic Analysis sales of motor vehicles in the United States fell by 18 per cent in 2008. Weak demand for steel intensive manufactured goods and lower construction activity is expected to persist through 2009.

Economic growth is assumed to begin recovering in OECD economies from 2010, which means there should be a corresponding pick up in steel consumption. However, the recovery in OECD steel consumption is expected to be modest. Steel intensive manufacturing has been progressively moving out of developed economies and into emerging economies where production costs are lower and end use markets are growing, a trend which is expected to continue.

Global steel production to fall in 2009…

Falling steel demand is expected to lead to a contraction in global steel production of around 6 per cent in 2009. Steel production in the United States, Japan and European Union is forecast to decline sharply by 15 per cent, 18 per cent and 10 per cent respectively. Steel production in developing countries such as China and India, which have underpinned world steel output growth over the past few years, is forecast to grow relatively slowly in 2009 at 3 per cent and 4 per cent respectively.

…but recover relatively quickly

Following recessions in the 1980s and 1990s, global steel production took eight to nine years to recover to pre-recession levels. However, it is expected global steel production will experience a relatively quick recovery from the current recession.

China is expected to underpin this quick recovery. Contributing to a rapid recovery in China’s steel production growth will be aggressive government action to stimulate the Chinese economy. This includes the US$586 billion stimulus package announced in November and significantly reduced interest rates. It is likely the Chinese Government will announce additional stimulus measures and reduce interest rates further to support economic growth in the short term. The downside risk to this forecast is global economic growth could take longer to recover than currently assumed.

Over the medium term, strong growth in Chinese steel consumption and the low cost nature of producing steel in China should encourage ongoing investment in Chinese steel production. Over the five years to 2014, Chinese steel production is projected to grow by an annual average of 7 per cent a year to 770 million tonnes. Steel production in India, the Russian Federation and Brazil is also expected to recover strongly because of assumed strong economic growth in these countries and demographics which are favourable for long-term growth in steel production and consumption.

On the other hand, steel production in the United States, European Union and Japan is projected to recover at a much slower rate. Increased steel production and exports from emerging economies are expected to replace less efficient steel producers in the developed world.

Raw material outlook

The outlook for iron ore and metallurgical coal prices over the next five years is varied. Contract prices for both iron ore and metallurgical coal are expected to fall substantially for JFY 2009 (Japanese financial year, April to March) – from record prices negotiated for JFY 2008 – with further declines in JFY 2010 also possible. However, prices for iron ore and metallurgical coal are expected to recover in the second half of the outlook period, supported by strong demand from developing countries.

Negotiated prices to fall in the short term…

Following substantial increases in JFY 2008, contract prices for Australian iron ore and metallurgical coal are expected to fall substantially for JFY 2009.

There are several factors supporting this view. First, steel production cuts in the second half of 2008 and early 2009 have significantly reduced demand for iron ore and metallurgical coal. Second, exchange rate movements are an important determinant of the contract prices which are settled in US dollar terms. The value of the US dollar has increased significantly against the Australian dollar over the past year. Consequently, there could be downward pressure on the negotiated prices (in US dollars) for JFY 2009 as a result of the recent exchange rate movements.

Negotiated iron ore and metallurgical coal prices are expected to decline for several years beyond 2009. The negative effects of the global economic downturn on steel production and consumption in North America and Europe are expected to linger until 2010. In addition, recent expansions to iron ore production capacity and additions to coal supply infrastructure is projected to ensure supply outpaces demand growth in the short term.

…but pick up toward end of outlook period

Iron ore and metallurgical coal contract prices are expected to rise modestly toward the end of the outlook period because of a recovery in demand and the potential for supply to tighten in the medium term.

Demand for steel-making raw materials is expected to recover in the second half of the outlook period in line with a recovery in global steel production. Iron ore supply growth is also projected to slow in the second half of the outlook period. Falling prices over the next few years are expected to lead to a contraction in investment in new iron ore mining capacity and a decline in high cost supply from China and India.

Metallurgical coal prices have the potential to rise toward the end of the outlook period. Supply constraints, particularly in relation to Australian port and rail infrastructure, were a contributing factor to the price rise to a record US$300 a tonne for hard coking coal in JFY 2008. If planned infrastructure expansions are delayed or abandoned because of the current economic downturn and lower coal prices, then there is the potential for bottlenecks to re-emerge over the medium term.

Raw material demand

The current downturn in the global steel industry is expected to lead to a fall in demand for iron ore and metallurgical coal in the short term. Global iron ore and metallurgical coal trade is forecast to decline by 4.6 per cent and 11 per cent respectively in 2009. Over the medium term, the global steel industry is expected to recover which is projected to lead to a recovery in demand for iron ore and metallurgical coal. Over the five years to 2014, global iron ore trade is projected to grow by 5 per cent a year to 1.2 billion tonnes and global metallurgical coal exports are projected to grow by an average of 2 per cent a year to around 260 million tonnes.

Iron ore demand dependant on China

China is the world’s largest importer of iron ore accounting for almost 50 per cent of world iron ore imports in 2008. China’s demand for iron ore has fallen sharply in recent months as a result of steel mill shutdowns. For 2009 as a whole, China is not expected to achieve any growth in iron ore imports compared with 2008, which compares to average annual growth of around 25 per cent over the past five years.

The fall in iron ore import demand in the short term is expected to be severe in the developed world. Steel mill shutdowns in north Asia and the European Union have been substantial. As a result, iron ore imports in Japan, the Republic of Korea and the European Union are forecast to fall by 19 per cent, 20 per cent and 17 per cent respectively in 2009.

Over the medium term, Chinese iron ore imports are expected to recover strongly. As discussed earlier, Chinese steel production is expected to increase from 2010 onward. In addition, there are many high cost iron ore mines in China which increased output because of high prices over the past few years. Many of these mines are shutting down as demand and prices fall. With prices not expected to return to the highs of 2008, it is likely that many high cost Chinese iron ore mines will remain closed over the outlook period. This means Chinese steel producers should become increasingly reliant on imported iron ore from low cost suppliers in Australia and Brazil. Over the five years to 2014, China’s iron ore imports are projected to grow by around 10 per cent a year to 780 million tonnes.

In OECD economies, the recovery in steel production is expected to be gradual. Therefore, a recovery in iron ore imports is also expected to be modest. In the case of Europe, Japan and the Republic of Korea, iron ore imports are projected to remain below 2008 levels over the outlook period.

India and European Union the main sources of metallurgical coal demand growth

Over the next five years, world trade in metallurgical coal is projected to grow by 2 per cent a year to around 260 million tonnes. India and the European Union are expected to be the main sources of demand for imported metallurgical coal.

Strong growth in steel production is expected to underpin growth in India’s imports of metallurgical coal. In 2008, around half of India’s metallurgical coal requirements were met through imports. This proportion is projected to rise over the medium term as almost all coal reserves in India are of lower grade coal. If India’s steel industry expands as expected, it will need to rely increasingly on imports of high grade metallurgical coal.

India’s imports of metallurgical coal are projected to rise on average by around 10 per cent a year to 45 million tonnes in 2014. This means around two-thirds of India’s metallurgical coal consumption would be met through imports by 2014.

Despite a projected fall in steel production in the European Union over the medium term, imports of metallurgical coal are still projected to rise. Metallurgical coal production in the European Union is expected to decline because of a phasing out of subsidies to the German and Polish coal industries. Because of the expected decline in EU coal production, demand for imported coal is expected to rise. In the five years to 2014, EU imports of metallurgical coal are projected to rise by an average of 4 per cent a year to around 64 million tonnes.

Iron ore and metallurgical coal supply to fall in 2009

Global steel production cuts, and the consequent contraction in iron ore and metallurgical coal demand, have led to miners reducing production and shipments in late 2008 and into 2009. As a result, world iron ore exports are forecast to decline by 5 per cent and metallurgical coal exports by 11 per cent in 2009. The relatively larger decline in metallurgical coal trade reflects the situation that China is largely self-sufficient in metallurgical coal. The demand for raw materials from Chinese steel industry is expected to provide some support for iron ore trade but not for metallurgical coal.

For iron ore, a decline in exports from India is expected to be the main contributor to the fall in world exports in 2009. Iron ore exports from India increased strongly over the past few years in response to high spot prices in China. However, because of infrastructure constraints and export taxes, Indian iron ore has higher cost compared with Australian and Brazilian ore. Spot iron ore prices in China have fallen considerably and consequently a reduction in high cost Indian exports is expected.

In the two largest iron ore exporting countries, Australia and Brazil, producers have implemented production cuts in order to reduce iron ore supply in line with demand. In Brazil, Vale announced it would shut down around 30 million tonnes of iron ore production capacity from November 1 2008. In Australia, Rio Tinto cut iron ore production to around two-thirds of capacity in the final three months of 2008. However, exports from Australia are forecast to rise in 2009 as Rio Tinto restarts mines which were temporarily closed in late 2008 and BHP Billiton and Fortescue Metals increase output from recently commissioned operations.

Over the medium term, world iron ore exports are forecast to grow by an average of 5 per cent a year to 1.2 billion tonnes by 2014.

Australia is expected to account for a significant proportion of this increase with iron ore exports projected to grow by around 8 per cent a year to 487 million tonnes by 2014. BHP Billiton’s Rapid growth 4 and 5 projects (combined additional capacity of 76 million tonnes a year), the continued ramp up of Fortescue Metals Pilbara iron ore operations and Rio Tinto’s expansion of production capacity to more than 220 million tonnes a year are expected to underpin this growth. There are also several magnetite projects scheduled to begin production over the outlook period. However, the combined effect of falling iron ore prices and the global financial crisis on project funding could delay the development of higher cost projects in the short term.

Despite recent delays in project developments, such as the completion of Vale’s Carajas expansion (additional 30 million tonnes a year) from 2009 until to 2011, exports from Brazil are projected to grow strongly. The largest contributor to Brazil’s export growth will be Vale’s Serra Sul project (90 million tonnes a year), scheduled for completion in 2012. Overall, iron ore exports from Brazil are projected to grow by an average of 7 per cent a year to 416 million tonnes by 2014.

Iron ore exports from West Africa have the potential for growth toward the end of the outlook period because of several large mines being considered for development. However, there are substantial risks associated with investing in African mining, particularly sovereign risk. An example is illustrated by Rio Tinto’s Simandou project in Guinea. On 1 August 2008, Rio Tinto received a letter from the President of Guinea to rescind the Simandou Mining Concession. Now that iron ore prices are falling and the global financial crisis has reduced investor’s appetite for risk, projects in risky countries may be delayed or abandoned, at least for the short term.

Metallurgical coal exports are dominated by Australia, which was estimated to have accounted for around 60 per cent of global exports in 2008. Exports from Australia are forecast to fall in 2009 because of production cutbacks announced by the largest producer BHP Billiton Mitsubishi Alliance (BMA). BMA has announced it will be operating at 10 to 15 per cent below capacity in the first half of 2009 because of weak demand. In addition, semi-soft coking coal can be used as a substitute for thermal coal in power generation. Consequently, some coal producers are expected to export semi-soft coking coal into the thermal coal market where demand and prices are expected to be relatively stronger.

Metallurgical coal exports from Canada are also expected to fall in the short term. Canada’s largest metallurgical coal producer and exporter, Teck Cominco, announced in January it would reduce metallurgical coal production to 20 million tonnes in 2009. In addition, the Russian Federation’s largest coal exporter, Yakutugol, is planning to cut production by 3.4 million tonnes of mainly metallurgical coal in 2009.

Over the medium term, metallurgical coal exports from Australia are forecast to rise. Infrastructure limits have been a major issue preventing Australian metallurgical coal exports from reaching their potential over the past few years. However, planned expansions to Australia’s coal infrastructure should be sufficient to meet expected demand growth over the next five years. Over the five years to 2014, the volume of Australia’s metallurgical coal exports are projected to grow by around 3 per cent a year to more than 160 million tonnes. The main risk to this projection is infrastructure expansions may be delayed because of weak demand and falling metallurgical coal prices in the short term.

Metallurgical coal exporters in Canada and the United States generally face higher production costs than those in Australia. An expected fall in metallurgical coal prices over the next few years means the highest cost producers in these regions are likely to shut production. With only modest price increases expected toward the end of the outlook period it is unlikely Canadian and US metallurgical coal exports will return to 2008 levels by the end of the outlook period.

Metallurgical coal exports from Africa are expected to rise toward the end of the outlook period when production commences at Vale’s Moatize coal mine (8.5 million tonnes a year of metallurgical coal) in Mozambique.

World iron ore trade outlook (Mt)

2007

2008

2009 s

2010 f

2011 f

2012 f

2013 f

2014 f

Iron ore imports

EU 27

170

173

144

149

150

152

153

Japan

139

140

114

118

120

122

123

125

China

384

444

449

498

559

624

698

781

Korea, Rep. of

Chinese Taipei

World imports

829

894

853

913

982

1 045

1 115

1 187

Iron ore exports

Australia

267

310

319

347

395

422

459

487

Brazil

269

281

284

315

336

365

386

416

India

Canada

South Africa

Sweden

World exports

829

894

853

913

982

1 045

1 115

1 187

f ABARE forecast. s ABARE estmate.

World metallurgical coal trade outlook (Mt)

2007

2008

2009 s

2010 f

2011 f

2012 f

2013 f

2014 f

Metallurgical coal imports

EU 27

Japan

China

Korea, Rep. of

Chinese Taipei

India

Brazil

World imports

227

233

208

221

233

241

250

258

Metallurgical coal exports

Australia

138

135

125

133

144

150

156

162

Canada

United States

Russian Federation

World exports

227

233

208

221

233

241

250

258

f ABARE forecast. s ABARE estmate.

Under construction Queensland port expansion

project

status

expected startup

new capacity

capital expend.

Abbot Point Coal
Terminal X25 expansion,

Expansion under construction

mid 2009

Terminal capacity increase from 21 Mtpa to 25 Mtpa

$95m

Abbot Point Coal Terminal
X50 expansion

Expansion, committed

mid 2010

Terminal capacity increase from 25 Mtpa to 50 Mtpa

$818m

Brisbane Coal Terminal expansion

Expansion, under construction

2009

3 Mtpa increase

$60m

Dalrymple Bay Coal Terminal 7X expansion project Phases 2/3

Expansion, under construction

early 2009

Port capacity increase from
68 to 85 Mtpa

$679m

Iron ore, steel and metallurigical coal outlook - Australia

unit

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

Production

Iron and steel s

8.01

8.12

7.08

8.19

8.47

8.59

8.64

Iron ore

287.7

324.7

340.0

367.7

405.5

438.0

468.5

504.9

Metallurgical coal

142.6

140.1

135.4

136.3

144.3

152.9

159.0

165.3

Exports

Iron and steel as

2.65

2.13

1.01

2.09

2.26

2.33

2.79

Nominal value

A$m

1 743

1 562

958

1 301

1 147

1 243

1 279

1 532

Real value b

A$m

1 838

1 594

958

1 276

1 098

1 161

1 165

1 361

Iron ore

257.4

294.3

298.0

337.5

375.0

407.0

437.1

473.5

Nominal value

A$m

15 512

20 511

34 073

27 117

24 888

24 303

26 443

29 676

Real value b

A$m

16 362

20 923

34 073

26 602

23 820

22 693

24 089

26 375

Metallurgical coal

132.0

136.9

129.4

130.2

137.9

146.4

152.5

158.9

Nominal value

A$m

15 039

16 038

36 226

20 848

19 647

20 493

22 626

25 282

Real value b

A$m

15 863

16 361

36 226

20 452

18 804

19 135

20 611

22 469

a Includes all steel items in ABS, Australian Harmonized Export Commodity Classification, chapter 72, ‘Iron and steel’, excluding ferrous waste and scrap and ferroalloys. b In 2008-09 Australian dollars. f ABARE forecast. s ABARE estimate. z ABARE projection.
Sources: International Iron and Steel Institute; Coal Services Australia; Queensland Coal Board; United Nations Conference on Trade and Development; ABARE.