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Steel Raw Materials

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Metal Bulletin’s 62% Fe fines index recovered slightly to $66.92 per tonne cfr Qingdao on Friday May 18, from $64.96 per tonne cfr five-weeks earlier on April 13. With half of the trading days in May remaining, this month has so far averaged slightly higher than April.

Rising Chinese crude steel production has been able to wave off the bearish risks from oversupply as domestic iron ore supply growth appears moderate. But we still believe iron ore prices will come down in the second quarter as we enter a seasonally weaker period.

Crude steel output in China continues to outperform the rest of the world and has beaten many expectations. According to preliminary statistics published by the National Bureau of Statistics of China, April crude steel production in China grew by 5% month-on-month to 76.7 million tonnes. This was a surprisingly bullish result, especially given the 11% upsurge in crude steel output the previous month. Despite the rising demand, April seaborne iron ore imports into China were 3.30% lower than March. In order to meet the demand from growing steel production, Chinese mills have drawn from stocks which shrank by 2.40 million tonnes in April. It was the first time since September 2017 that we saw stocks shrink month-on-month.

Average blast furnace utilization rates in China in April saw the largest month-on-month increase in at least two years. It is quite rare to see blast furnace utilization rates rise sharply in two consecutive months as in March and April this year. This followed the four-month-long decline in utilization rates since October last year, which was the last month before the cap on blast furnace utilization was put in place. Once winter caps were lifted in mid-March, the monthly average rate climbed to a six-month high of 86% (see chart).

Australian coking coal exporters also established, whether temporary or otherwise, a floor and succeeded in raising prices in May. Metal Bulletin’s daily index for premium hard coking coal closed at $183 per tonne fob DBCT on May 18, up from $172.56 on April 27 when the price reached bottom, but still lower than $190.74 on April 13.

While Chinese coal prices seem likely to find support from Australian competitors keen to raise prices, a threat is reviving from local coke producers, given the persistent decline in their apparent margins over local coals. Chinese domestic coke prices are beginning to look unprofitable for suppliers seeing as the conversion margin is trending down to around $20 per tonne, which is equivalent to no profit margin. The average conversion margin during the past two years of profitable times has been $40 excluding sales taxes, and every time profitability has been tested during that period, such as last month, there has been a recovery. But with coal suppliers in no mood to drop prices, the onus is on coke producers to push for further price rises too, and they have threatened to restrict production.

In the ferrous scrap market, the US prices faced headwinds in May after two months of increases. As MBR forecast, prices for obsolete scrap fell further than those for prime grades. Prime grades prices remained unchanged in Chicago and Pittsburgh after scrap sellers pointed to strong finished steel prices as a reason to resist mill attempts to reduce buying prices. The export-dependent Philadelphia market performed worse. The US domestic scrap demand recovery remains sluggish. Raw steel output inched up by 1.70% to 33.25 million net tons thought May 12, lagging behind MBR’s relatively bearish 2018 forecast of a 3.47% year-on-year growth.

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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