Chris Newman - Argus Media Singapore - Chinese steel outlook and raw materials market impact

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Market Reporting

Consulting

Events

Chinese steel outlook and raw materials impactPerth

Chris Newman9 March 2016

Copyright © 2016 Argus Media Ltd. All rights reserved.

Market Reporting

Consulting

Events

Executive Summary

• Steel outlook

o China fundamentals

o China policy

o China sentiment

• Feedstocks impact

o Iron ore

o Coking coal

o PCI

o Met coke


Argus is newest entrant in steel space

• Independent UK-based publisher

• The world’s largest privately held price-

reporting agency (PRA)

• Founded in 1970, 750 staff in 23 countries

• Publish 10,000 price assessments a day

• Indexes for coal date to 1980s

• Iron ore indexes launched in 2013

• 2014: non-ferrous

• 2015: ferrous

Market Reporting

Consulting

Events

Steel outlook


Stabilization in Chinese steel demand remains elusive

2007 2009 2011 2013 2015

-40%

-20%

0%

20%

40%

60%

80%

100%

-40%

-20%

0%

20%

40%

60%

80%

100%

Property Sales

Housing under construction

Housing starts

China residential real estate sales and construction

0.0

2.0

4.0

6.0

8.0

0%

10%

20%

30%

2007 2009 2011 2013 2015

M2 money supply Total credit

1 yr lending rate 3M SHIBOR

Chinese interest rates and credit indicators

• No signs of improvement in current indicators

◦ Leading economic indicators weak on balance

◦ Little evidence that Chinese industrial slowdown in abating

• But this is not due a total absence of effort to stimulate growth

◦ Chinese interest rate cuts, fiscal ramp up

◦ Signs of improvements in some sectors (home sales rise, money supply increase, credit stabilizes, auto production booms)

Source: Argus Consulting

Source: Argus Consulting


Massive shift in views as China demand declines

0

10

20

30

40

50

60

70

80

90

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

2013 view

New view?

Chinese apparent steel consumption mn t

Source: PBC, NBS, Argus

• Radical change in view of growth in the next five years. What changed?

◦ Imbalances became more acute

‐ Credit/GDP

‐ Housing inventory

◦ Deliberate effort to slow economy/credit in 2013

◦ Steel demand has fallen ~6pc in 2015

• 10-day National People’s Congress opened 5 March with Premier Li

giving top priority to development

• National Development and Reform Commission released draft plan

that calls for:

◦ fixed asset investment to increase by 10.5pc

◦ 300 projects launched 2016-2018

◦ 50 new airports by 2020

• Will the spending halt progress on reforms and overcapacity or will

it help ease the transition:

◦ China will spend 100 billion yuan ($15 billion) to retrain and transition

workers in steel and mining

◦ Pledged to cut 100-150 million tons of steel capacity over next five years

• Lending standards remain the key question for steel cuts


China’s 13th five year plan sets new growth plans


Ex-China steelmakers see pain intensified 2H15

280

285

290

295

300

305

310

315

320

325

330

335

280

285

290

295

300

305

310

315

320

325

330

335

Jan Feb Mar AprMay Jun Jul Aug Sep Oct NovDec

2013 2014 2015

Source: worldsteel, Argus

Europe, Japan, Korea, Taiwan, India & Brazil

pig iron output

-1pc in 2014

… while ex-China BFs also chase

mn t ann

30

35

40

45

50

55

60

65

70

75

80

160

180

200

220

240

260

280

300

320

340

360

Oct-14 Feb-15 Jun-15 Oct-15 Feb-16

Ferrous scrap HMS1-2 80-20

cfr Turkey

iron ore fines 62pc Fe cfr

China

European EAFs chase China BFs …

Source: Argus

• China steel exports rose by 20% to 112.4mn t in 2015

• Turkey imported 10 times more Chinese semi-finished steel in

2015 than in 2014

• UK shipped 600t of semi-finished products to Turkey in 2015

after supplying 850,000t-1mn t of semi-finished steel to Turkey

in 2013 and in 2014.

• In SE Asia, Chinese exports pushed out Russian HRC, billet and

rebar.

• Argus basic pig iron fob Black Sea price at $175/t for Russian

material and $170/t for Ukrainian on 28 January, declined by

$60/t and $65/t over previous six months, respectively.

Chinese exports targeted SE Asia, CIS, Europe


Is China finally giving world (temporary?) reprieve


Source: MetalPrices.com, Argus

$200

$220

$240

$260

$280

$300

$320

$340

$360

$380

Jun-15 Aug-15 Oct-15 Dec-15 Feb-16

fob Shanghai

fob Black Sea

Hot rolled coil pricesTurkish HRC domestic/export 2/26

Vietnam billet imports 2/26

Tangshan billet 3/2

Recent price gains have been across products


• Consolidation of China’s steel industry is inevitable, at some point will reduce its iron ore demand.

• Policy announcements for growth and reform as well as swings in sentiment will act on prices over shorter timeframes.

• China’s steel industry will ride out market swings, ramping capacity up or down, until banks reign in lending to inefficient operations and zombie mills.

• China’s steel exports likely will decline on attention shifting to domestic sales this spring and anti-dumping actions piling up, ie. EU risks from May.

• China’s pullback from export markets this year has given the market some balance, but whether it will last is up in the air.

Steel outlook


Market Reporting

Consulting

Events

Feedstocks impact

Feedstock indexes have tracked steel’s downturn


0

5

10

15

20

25

30

35

40

$0

$20

$40

$60

$80

$100

$120

$140

$160

Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16

63% lump

premium

58% Fe

62% Fe

65% Fe

Cfr Qingdao spot iron ore indexes

$70

$80

$90

$100

$110

$120

$130

$140

Mar-14 Sep-14 Feb-15 Aug-15 Feb-16

fob Aus low vol

fob Aus mid vol

cfr China low vol

cfr China mid vol

cfr India low vol

cfr India mid vol

Asia-Pacific spot coking coal indexes

Source: ArgusSource: Argus

Australia/Brazil lift share of China iron ore imports


77%

23%

84%

16%

2014 2015

Quality and pricing match ups will be the focus as Brazil and

Australia market share battle intensifies. 1 March 16:

169kt SSFG 61.68pc with 14 February bill of lading traded at

$50.85/t

170kt PB fines 61pc with 18-27 March laycan sold at $50.67/t.

Source: China customs

Iron ore price bounces lend pain and hope


$30

$40

$50

$60

$70

$80

$90

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16

58% Fe

ICX 62%

Fe

65% Fe

Source: Argus

Australia shifts coking coal sales to Europe, India


$70

$80

$90

$100

$110

$120

$130

$140

$150

$160

Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15

Metallurgical coal price markers

Spot fob Aus low-vol hard coking

coalContract fob Aus low-vol hard

coking coal

0

20

40

60

80

100

120

140

0

5

10

15

20

25

30

35

2010 2011 2012 2013 2014 2015

Tota

l

Australian hard coking coal exports

Total China India

Japan S Korea Europe

mn t

Source: Australian Bureau of Statistics

• US mine supply closures accelerating

• Australian supply now falling modestly

• Signs that Chinese domestic supply is falling faster than pig iron production

• Stocks at mills and coke plants falling. Is demand higher than supply?


Coking coal supply-demand more in balance

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

-15%

0%

15%

30%

-15%

0%

15%

30%

Seaborne + Mongolian exports

Chinese apparent domestic supply

Metallurgical coal supply

10

12

14

16

18

20

22

10

12

14

16

18

20

22

1 5 9 13 17 21 25 29 33 37 41 45 49

2015 2013

2014 2016

Coking coal stock at mills and coke plants

days of use

Source: Macquarie

Coking coal valuation driven by many factors


Coking coal price

Regional differences

Supply and demand

CSR, volatility, fluidity, ash content

Quality consistency

PCI prices supported by lack of thermal switching


$30

$35

$40

$45

$50

$55

$60

$65

$70

$75

$80

May-15 Jul-15 Sep-15 Oct-15 Dec-15 Feb-16

low vol cif ARA

low vol fob Baltic

mid vol cif ARA

mid vol fob Baltic

6000kcal fob Baltic ports thermal

European PCI and thermal spot prices

$40

$45

$50

$55

$60

$65

$70

$75

$80

Jun-15 Aug-15 Sep-15 Nov-15 Dec-15 Feb-16

low-vol fob Aus

low vol cfr China

mid vol fob Aus

mid vol cfr China

6000kcal fob Newcastle thermal

Asia-Pacific PCI and thermal spot prices

Source: Argus

Met coke prices pushed/pulled by China, overseas


$100

$110

$120

$130

$140

$150

$160

$170

$180

$190

$200

Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16

62 CSR 65 CSR

Metallurgical coke fob north China

Source: Argus

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Chris NewmanSenior editor, Argus Steel Feedstocks

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Chris Newman - Argus Media Singapore - Chinese steel outlook and raw materials market impact

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