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Gradual decline in prices looks set to continue

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Metal Bulletin’s 62% Fe fines index lost $4.88 per tonne between March 16 and April 13, closing at $64.96 per tonne cfr Qingdao. Prices peaked at $78.97 per tonne at the beginning of March as purchasing activity picked up after the Lunar New Year celebrations, but the uptick in demand was not significant enough to sustain price levels close to $80 per tonne. The iron ore fines index has shrunk 18% from the peak in the first week of March, which appears to be a large enough price drop for the market to reach a temporary equilibrium just below $65 per tonne.

Uncertainty about global trade policy is having an impact on iron ore market sentiment. Although Section 232 in the United States has a very limited impact on China, from which exports of steel to the US are very low, the escalation of the trade tension is affecting sentiment. Some mills are reluctant to make any bookings for seaborne material and some have put their purchasing plans on hold. The market is no fan of uncertainty and participants are waiting to see if there are further repercussions of the proposed tariffs. This could be pulling prices down at least temporarily.

Overall, Metal Bulletin Research expects iron ore prices to come down over the coming months as Chinese domestic iron ore supply remains healthy and steel production is expected to wind down. However, we do not expect a drastic fall. Operating margins for Chinese mills remain strong, averaging above $120 per tonne for both rebar and hot-rolled coil since March. There is therefore still a strong incentive for mills to maintain production. Crude steel output rose to 74 million tonnes in March, up by 12% month-on -month and by 4% year-on-year.

Coking coal prices have also followed the downtrend. The Metal Bulletin hard coking coal index slid by $17.28 per tonne over a month to $188.41 per tonne cfr Jingtang on April 13. Healthy supply volumes at a time of stalling Chinese blast furnace utilization rates (83% in March) are helping to press prices lower. A retreating coal price is undermining cost support for coke, while the enlarged price spread of Chinese domestic above seaborne material appears precarious given the prevailing conditions.

Market participants should be aware that the Chinese authorities still have the ability to introduce market controls should coal prices detract from their ‘reasonable price range’. Even though the restrictive working day policy has not featured in the sector for some time, it is still a considered aim of the authorities to avoid significant spot price volatility. Of late, authority intervention is reported to have appeared in the form of coal import restrictions in southern and eastern China. Unlike the working day policy, the impacts of the import restrictions are likely to be slight. Nevertheless, it serves as a reminder that the authorities are prepared to take significant action to help influence the coal price for the benefit of their domestic sector.

Although the share of imports remains a relatively small part of domestic coking coal consumption in China, the country imported nearly 30 million tonnes of hard coking coal from Australia last year, as the chart illustrates. This was a 5% rise from 2016. China had a strong performance in 2017 with rising crude steel production, feeding the demand for imports as stricter regulations capped domestic coking coal production. China accounted for 27% of Australian hard coking coal exports, overtaking India as the largest importer of Australian hard coking coal. Australian production is expected to increase this year from 2017 levels when weather-related outages forced output down by 10 million tonnes.

Analysis by Alona Yunda, Metal Bulletin Research

In this regular section, Metal Bulletin Research’s base metals team summarise their in-depth reports to highlight key factors
driving the markets and their short-term price forecasts. The weekly service, Base Metals Market Tracker, provides independent analysis and forecasts for base metals markets and prices.

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