IRON ORE AND STEEL MARKET OVERVIEW 2019-2020

Global iron ore prices entering the down trend is bad tidings for Indian exports. After rocketing to a five-year high of $121 per ton in July, spot iron ore prices plummeting to $93, causing panic among the country's iron ore exporters.

 Exports of iron ore had gained traction since the tailing dam burst at Vale's key mine in Brazil earlier in January spooked supplies, triggering a sharp escalation in prices. Shipments of lower grade material from India surged as China's steel mills showed greater appetite for sourcing iron ore of Indian origin.

After the crisis at Vale's mine, iron ore exports from India spiked. The country closed 2018-19 with exports of 16.2 million tonnes (mt), overshooting iron ore imports of 12.6 mt.

Stabilizing supplies have helped exert downward pressure on iron ore prices. Backed by the resumption of Vale's Brucatu iron ore mines in June, iron ore exports from Brazil have risen 17 per cent sequentially in July. The Brucatu mines have capacity to unearth 30 million tonnes each year. Moreover, supplies from Australia are also building on after a tropical cyclone had disrupted operations of some mines in March.

That apart, downside risks to international iron ore prices also prevail because of anticipation of weaker Chinese steel production growth in second half (H2) of calendar 2019 following an escalation of US-China trade-tensions, a sharp depreciation of the Yuan (China's currency) and a corresponding decline in mill purchasing power.

Tighter iron ore market leads higher price forecasts

Impact from Vale’s accident to be longer and substantial

• The impact from the accident on Vale’s annual production is estimated to be over 80 million (m) tons (19.5% of its 2018 its production volume or c.5.2% of global seaborne iron ore market
• Focus shifts from growth to safety for mine operations: General regulation on safety in mining industry will be reinforced, increasing mining cost and decelerating production growth
• Cyclone in Australia aggravate the supply tightness: Rio Tinto’s shipment target to revised down by c.15%

Outlook on steel prices and margins

• Steel prices are rising on cost-push factors: Steel prices have bottomed out in the beginning of this year spurred by higher iron ore prices.
• Major steel mills are raising selling prices proactively to pass on the cost burden from iron ore prices to steel prices in 2Q19.
• Despite price hikes, steel mill’s margins remained depressed in 1Q19 and are expected to remain flat in 2Q19 because of strong production growth and VAT cut in China.
• Profit is expected to improve in 3Q19 backed by demand improvement in China and steel prices’ hikes and stabilising raw material cost.
• Raise our price forecast for iron ore and steel by 18% and 2%, respectively, for 2019.

China stimulus measures to boost steel demand

• Thanks to the stimulus measures such as tax cuts and lower required reserve ratio (RRR) since mid 2018, China’s fixed asset investment (FAI) continued growth after rebounding in Aug 2018. Its manufacturing PMI is also back on expansion in Mar 2019, alleviating concerns.
• More stimulus measures to support infrastructure projects in 2019.
• Infrastructure projects, especially the subway and railway construction, should generate steel demand.
• Our analysis shows the steel demand from railway and subway investments to be 4m tons and 49m tons, respectively.
• Nevertheless, global steel demand is expected to decelerate to 0.8% and 1.1% in 2019 and 2020.

China steel industry outlook

• China’s steel supply growth to be limited by the continued environmental policy-driven plans, and capacity utilisation to remain stable.
• China’s steel demand to fall moderately in 2019, negatively affected by the real estate sector and offset by growth in infrastructure demand
• Steel exports to be steady in 2019, with market expanded through China’s Belt and Road initiative

Global steel demand

World steel forecasts global steel demand will reach 1,735 Mt in 2019, an increase of 1.3% over 2018. In 2020, demand is projected to grow by 1.0% to reach 1,752 Mt.

Growth in steel demand remains positive

In 2018, global steel demand increased by 2.1% . We expect demand to further decelerate to 0.3% in 2019 and 0.7% in 2020, reflecting a deteriorating trade environment.

increase. In 2019 and 2020, steel demand is likely to contract slightly due to a moderation of construction activities and decelerating exports despite the support provided by public projects.

Steel demand in the emerging economies excluding China is expected to grow by 2.9% and 4.6% in 2019 and 2020 respectively

ASIA

Having overcome the shocks of demonetisation and the Goods & Services Tax (GST) implementation, the Indian economy is now expected to achieve faster growth starting in the second half of 2019 after the election. While the fiscal deficit might weigh on public investment to an extent, the wide range of continuing infrastructure projects is likely to support growth in steel demand above 7% in both 2019 and 2020.

Steel demand in developing Asia excluding China is expected to grow by 6.5% and 6.4% in 2019 and 2020 respectively, making it the fastest growing region in the global steel industry. In the ASEAN region, infrastructure development supports demand for steel.

MENA

Economic diversification efforts in the GCC continue in reaction to a low oil price environment but fiscal consolidation is still supressing construction activities. Steel demand is expected to continue to contract in 2019, with a minor recovery expected in 2020.

Iran’s steel demand will also contract in 2019 as the reinstatement of US sanctions causes a recession in the economy.

The situation in North Africa looks brighter, with Egypt recovering strongly after the structural reforms of 2017. Investment in energy and a recovery in the real estate market are expected to drive Egyptian steel demand. Other North African economies are also expected to show resilient growth in steel demand backed by strong investment activities.

CIS & TURKEY

Despite improved oil prices, growth in steel demand in Russia will continue but is expected to be constrained by structural issues. The growth outlook for Ukraine is stable and improving, supported by domestic consumption.

The Turkish economy is still reacting to the currency crisis of August 2018, which led to contraction in steel demand. This is expected to continue into 2019, with some stabilisation in 2020.

LATIN AMERICA

A broad recovery in steel demand across Latin America is expected to continue despite internal and external uncertainty. Recovery in Brazil is in its third year with the construction sector expected to mildly improve in 2019. On the other hand, steel demand growth in Mexico is expected to be moderate, influenced by weak mining investment, fiscal budget constraints, policy uncertainties and a slowing US economy.

The political situation in Venezuela and its impact on the region is unclear.

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Outlook for Raw Material:

Both, Iron ore and coking coal prices remains strong notwithstanding the steel price pressure.

Coking Coal, spot at USD 228/t FoB Aus, 3rd Quarter 2019 average of USD 220/t.

Major global miners proposes to switch to 65% Fe fines index pricing in Pellet contracts

Chinese steelmakers turn their attention to scrap:

However, steelmakers in China are increasingly investing in EAF melt shops or are adopting alternative technologies that allow them to use more scrap in BOF mills- new technologies that allow them to go beyond 20 percent scrap as charge,