22.08.2018, 13:13
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Steel and pig iron
Global steel production growth rebounded strongly in calendar year 2017, with output increasing by 4 per cent YoY. That positive momentum has continued in the first half of calendar 2018. The recovery has been broad based and synchronous. According to worldsteel the global production run–rate hit a record of 1,842 Mtpa in June 2018, representing a growth rate of 5.8 per cent YoY. During H1 CY2018, production reached 1,778 Mtpa, or 4.6 per cent YoY. Pig iron output growth has been slower than that of total steel production, at 3.8 per cent YoY as of June 2018, or 1.3 per cent in H1 CY2018. Chinese output of pig iron increased by 3.8 per cent YoY during the month.
“Rising demand from key end–use sectors across all major regions and the ongoing impact of Supply
Side Reform measures in China have led to higher capacity utilisation rates globally.”
This has translated into wider margins and much improved profitability for mills. Global utilisation has reached around 78 per cent, the highest since calendar year 2012. That is around 13 percentage points higher than at the cycle trough.
The response to, and impact of, higher steel tariffs in the United States is a source of uncertainty. What is certain is that end–users in the US are paying considerably more for their steel than end–users in other regions. Hot–rolled coil (HRC) prices in the United States adjusted rapidly to pre-empt the tariffs. US HRC prices have now reached US$1,000/t. That compares to prices in the mid US$600s and the mid US$500s in northern Europe and China respectively.
In line with the expected slowdown in housing and autos, and the intra–year constraints imposed by environmental policies, China’s steel production growth is expected to moderate in the remainder of the 2018 calendar year based on our analysis. However, the market is expected to remain relatively tight for some time, with margins elevated. The publication of the working plan for the “Blue Sky Campaign”9has alleviated some uncertainty with respect to how the authorities will proceed with environmental restrictions.
We estimate that 80 per cent is the long run equilibrium crude steel capacity rate, consistent with the stated objectives in China’s steel industry Five Year Plan (2016–2020). That compares to slightly less than 70 per cent at the cycle trough and upwards of 85 per cent at the height of disruptions. In the early part of the Chinese summer, with most blast furnaces ex–Tangshan essentially free to operate, utilisation was close to 80 per cent.
We firmly believe that China will ultimately double its accumulated stock of steel in use, which is currently about 6tonnes per capita. That stock is about half of the current US level and slightly less than half the German, South
Korean and Japanese levels. However, the exact path to this end point for China has become less certain due to
increasing protection and aggressive capacity removal actions. Among the range of possibilities we consider, our
base case remains that Chinese steel production is yet to peak. The most likely timing of the peak is the middle ofnext decade.
Notably, the annualised steel production run–rate in China hit a record of 976 Mt in June 2018, while the 2017
calendar year tracked at 832 Mt, despite the winter cuts. Both figures are comfortably above the previous historical annual high of 822 Mt achieved back in calendar year 2014.
The recovery in the rest of the world continued in the first half of calendar year 2018. Based on figures from worldsteel, global steel production excluding China was up 3.2 per cent during H1 CY2018, at 868 Mtpa. Global pig iron, ex China, expanded by 2.5 per cent YoY during the period.
India saw steel output growth of 5.1 per cent YoY in H1 CY2018, with domestic demand recovering across the
infrastructure, construction and automobile sectors. Europe has been performing solidly (2.1 per cent YoY, run–rate 218 Mtpa during H1 CY2018), following the broad-based growth across key end–use sectors observed in calendar 2017. Eurofer is predicting a steady demand expansion through calendar year 2019, led by construction and machinery. Growth in North America was a healthy 2.4 per cent YoY in H1 CY2018, with a 119 Mtpa run-rate. The CIS (Commonwealth of Independent States), which had been lagging behind the recovery in the rest of the world in calendar year 2017, has rebounded to grow by 2.8 per cent YoY during the first half of CY2018.
Steel production elsewhere in Asia has been solid. The two major players, Japan and South Korea, are tracking well at 1.3 per cent YoY (run–rate of 107 Mtpa) and 3.7 per cent YoY (run–rate of 73 Mtpa) respectively during H1 CY2018. Japanese construction demand is improving, which is offsetting slower manufacturing demand and slightly lower direct exports. Some of our customers have indicated that construction activity is now expected to support solid end–use demand up to, and possibly beyond, the Tokyo Olympic Games in the summer of 2020.
Metallurgical coal
Metallurgical coal prices10 over the last six months have ranged from a low of US$175/t FOB Australia on the PLV index in April 2018 to a high of US$262/t in January 2018. MV64 has ranged from US$167/t to US$202/t; PCI has ranged from US$129/t to US$159/t; and SSCC has ranged from US$113/t to US$134/t. Approximately three–fifths of our tonnes reference the PLV index.
We have been pleased to see further growth in the met coal derivatives market, with traded turnover relative to the physical market rising at a faster pace than iron ore futures did at a similar stage of development.
“The differential between the PLV and MV64 indexes averaged 18 per cent in the financial year 2018.
That compares to an average of 12 per cent in financial year 2017.”
Similar to our view on iron ore, our technical and market research, in addition to extensive customer liaison, indicate that the premia presently being attracted by high quality coking coals are predominantly a structural phenomenon. Pig iron production in contestable met coal markets is estimated to have increased by 1.3 per cent year-to-date YoY as of June 2018. On balance, the seaborne market for coals referencing the PLV, PMV and MV64 indices still feels relatively tight going into the second half of calendar 2018.
Demand growth has been reasonably broad based by region, with India and Europe leading the way. Blast furnace restarts in India have driven a 14 per cent YoY increase in import volumes (across all met coal categories) as of June 2018. Longer-term, we anticipate that India and south–east Asia will be the main sources of incremental growth in seaborne demand for metallurgical coal.
On the supply side, coal throughput and vessel queues at the major Queensland ports have normalised to some
extent after the major disruptions of calendar year 2017. However, uncertainty remains with respect to mine–to–port logistics, due to both unplanned rail maintenance and prospective industrial relations activity. Met coal exports from the United States have responded to attractive seaborne prices, expanding by 22 per cent year–to–date YoY as of June. Europe, India and Brazil were the main destinations for US East Coast cargoes. Exports from Mozambique and Mongolia have been lower than expectations. Domestic Chinese supply has been relatively steady overall against a background of regional environmental pressures.
The extension of “Blue Sky” restrictions to China’s domestic coking coal (and merchant cokery) heartland (the Fenwei Plain), uncertainty around Mongolian supply, higher Chinese domestic logistics costs11, and increased Chinese tariffs on US met coal may all increase the competitiveness of high quality Australian coals into coastal China, at the margin.
Notably, while there remains potential for intra–year import curbs during lower demand periods, such curbs tend to impact upon energy coal and lower grade of met coal, and on lower tier ports. The vast majority of premium met coal cargoes are destined for tier one ports.
We maintain a constructive medium-term outlook for metallurgical coal prices. The Supply Side Reform and
heightened environmental controls in China are both supportive of the market. In the medium-term, the price benefits are expected to operate mainly through rising land–based logistics costs for domestic coals; enhanced value–in–use realisation for low impurity, high coke–strength after reaction products; policy induced as well as voluntary supply and capacity discipline among Chinese producers; and the overall productivity imperative among China’s blast furnace fleet in a world of structurally higher steel margins. So while prices will always be volatile within and across years based on both cyclical and idiosyncratic influences, it seems reasonable to suggest that met coal prices can sustain above long run marginal cost, on average, for some time to come.
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