Last month, we said a key indicator for iron ore prices will lie in how the expected uptick in demand will balance against unprecedentedly high port stocks combined with the growing domestic supply in China. It seems the year of the dog has begun cautiously as demand has remained stable and iron ore stocks continued to climb.
After a short-lived uptick in the second half of February, after the Lunar New Year, iron ore prices started to go down in March. Metal Bulletins 62% Fe fines benchmark declined by $9.55 to $69.84 per tonne cfr Qingdao on Friday March 16 from a peak of $79.39 on March 1. We think the market will continue downward due to ample iron ore supply. Still, we believe there is a limit to the fall and that the floor is likely to be not too far below $70 per tonne, especially as blast furnace utilization rates have kept climbing in March.
Coking coal prices, which have been sustained at high levels over the winter due to issues with supply out of Australia, are also likely to come down as the risk of disruption diminishes the closer we get to the end of the cyclone season. However, the question now is how much further iron ore and coking coal prices can drop if the strong crude steel output continues. The National Bureau of Statistics in China has announced that crude steel output for the first two months this year was up 5.90% year-on-year to 136.82 million tonnes.
As the cyclone season nears its end, another supportive pillar of coking coal will be withdrawn. Buyers no longer need to hedge potential disruptions and, amid higher inventories, become more relaxed with regards to contract delivery. Yet we are not completely free from the season (that lasts till early April) and Dalrymple Bay continues to struggle to ship at capacity. The vessel queue is down from over 40 in November, but remained relatively high at 20 in early March. With upcoming maintenance from April 9, there is a risk of further delays.
Last year, the cost of pig iron production jumped to the highest levels in three years, according to the analysis from Metal Bulletin Researchs Steel Cost Service. Elevated iron ore prices drove the total cost for iron ore in steelmaking higher by 30%, as the chart illustrates. However, relative to costs for other feedstocks, iron has become comparatively inexpensive.
Although the operating cost to produce one-tonne of pig iron was close to the $300 mark both last year and in 2014, iron ore no longer stands for the majority of the costs as it did three years ago. Its share of total costs was 57% then and this dropped to 43% in 2017. It is the rising coking coal prices rather than iron ore prices which have been the main driver behind the increased costs. Coking coals share averaged at 49% in 2017, compared with 35% in 2014.
This year, Chinese mills started to show a greater preference for hot metal over ferrous scrap, which is fundamentally driven by cost. Scrap consumption at the expense of iron ore and coke in the steelmaking process featured heavily throughout 2017 but started to fade at the end of the year. Scrap usage spiked when the material was cheaper than hot metal. Since scrap re-established its premium in mid-December last year, the weekly gap has averaged $20 per tonne over the three months. By mid-March, that premium stood at $23 per tonne (scrap excluding VAT over hot metal proxy), which is expected to put pressure on Chinese scrap prices.
Analysis by Alona Yunda, Metal Bulletin Research
Metal Bulletin Research
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