Iron Ore

Rare earths are hitting new price lows as major manufacturers continue to invest in new technologies to substitute them out due to price volatility. Iron ore is still oversupplied, but stockpiles are falling faster than expected.

Substitution is Hindering Rare Earths Demand

Reuters’ Andy Home recently wrote about how large manufacturers are finding substitutions for heavy rare earths in a gambit to avoid the boom and bust price cycles of the magnet and battery metals that previously disrupted their supply chains.

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Japanese automotive giant Honda and its technology partner Daido Steel recently announced a materials breakthrough in the electric motors used in hybrid vehicles. Starting with the next generation of “FREED” minivan due to go on sale later this year, Honda will be using a motor that doesn’t need heavy rare earth metals.

Specifically, it will be the world’s first hybrid engine, a gasoline and electric motor, to dispense with terbium and dysprosium.

“Major deposits of heavy rare earth elements are unevenly (distributed) around the world (…) thus, the use of heavy rare earth carries risks from the perspectives of stable procurement and material costs,” Honda said in a statement.

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A fairly innocuous sounding statement but one that cuts to the heart of the roller coaster history of the rare earths market.

Iron Ore Stockpiles Falling Fast

Iron ore’s wild price gyrations this year may be masking a small, but significant, shift in the underlying fundamentals for the steel-making ingredient. While seaborne iron ore remains a well-supplied market, it appears the level of over-supply has been diminishing faster than many expected, leading to an improvement in the supply-demand balance, Reuters’ Clyde Russell writes.

Essar Steel Minnesota filed for bankruptcy protection after losing its mineral leases in the Iron Range and ThyssenKrupp AG insists it’s still talking to Tata Steel about a possible purchase of European steel mills.

Essar Steel Minnesota Files for Chapter 11

Essar Steel Minnesota LLC  — the U.S. affiliate of India’s shipping, natural resources and power conglomerate Essar Global Groupfiled for chapter 11 bankruptcy protection on Friday.

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The company’s assets and liabilities are estimated to be worth between $1 billion and $10 billion, according to a court filing in the District of Delaware. The filing was prompted by Minnesota Governor Mark Dayton (D.) giving the order to terminate Essar Steel Minnesota’s lucrative mineral leases on Minnesota’s Iron Range. The company had been told that if it did not repay $66 million in infrastructure costs to the state and also pay its overdue contractor bills that the leases would be terminated.

ThyssenKrupp Says it’s Still in Talks With Tata Steel

Thyssenkrupp AG, Germany’s biggest steelmaker, confirmed on Sunday that it is in talks with India’s Tata Steel about a consolidation of beleaguered European steel mills that are hit by overcapacity, weak demand and cheap imports.

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Tata Steel said on Friday it had suspended the process of selling its troubled U.K. arm while it held talks with potential partners, including Thyssenkrupp, about alternative and more sustainable solutions for its entire European business. In addition to its U.K. operations, Tata Steel Europe also owns the former Hoogovens steel plant in the Netherlands which has been mentioned as part of a sale.

The international mining and metals sectors didn’t take a break for Independence Day. Rio Tinto Group has made its first moves under its new CEO and India is reconsidering its steel tariffs.

Jacques Shelves Rio Iron Ore Project

Rio Tinto Group has shelved its $20 billion Simandou iron ore project in Guinea because of a sustained slump in prices, the company’s new CEO Jean-Sebastien Jacques said in an interview with The Times newspaper.

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The world’s second biggest miner by market capitalization had been seeking financing for Simandou, even after a $1.1 billion writedown on the project in February. Last month the Anglo-Australian company submitted a feasibility study to the Guinean government.

But global oversupply of iron ore made the project inviable at this time, Jacques told The Times.

India is Reconsidering Steel Minimum Import Prices

India may alter the list of steel items that attract a minimum import price if the country decides to continue with the measure beyond August, steel secretary Aruna Sundararajan said.

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India imposed the minimum import price on 173 steel products in February, helping cut inbound shipments last month to their lowest level in at least 14 months.

This week in metals, aluminum prices hit a one-month high, even as surplus material in China looked like it would increase as smelters there went back online.

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Even when metals prices were rising across the board in the first quarter, aluminum was the laggard as oversupply still kept investors from buying it and construction demand remained tepid. Thanks to Chinese stimulus that construction demand has shot up and aluminum prices with it.

Aluminum: Smelt All You Want!

Reuters’ Andy Home and our own Stuart Burns both noted that while Beijing is doing everything it can to clean up overproduction in its steel sector — and the resultant pollution that comes with it — there’s no such commitment from the top when it comes to aluminum, mostly because of the state-of-the-art smelters Chinese companies have invested in.

How are Chinese smelters making money? Source: Adobe Stock/Pavel Losevsky

How are Chinese smelters making money? Source: Adobe Stock/Pavel Losevsky.

So, to recap, steel overproduction and pollution is bad but aluminum overproduction and, relatively, smog-free smelting? China is a-okay with that. What could possibly go wrong?

Rio Repositions

Meanwhile, things have gone significantly awry at Rio Tinto Group. The Anglo-Australian multinational miner shook up its organizational structure this week and head of iron ore commodities Andrew Harding was passed over for the CEO job by copper and coal division leader Jean-Sebastian Jacques. Jacques, a native of France, has only been there since 2011. Harding has been with Rio for 25 years and had been expected to replace departing CEO Sam Walsh this month. Read more

In a surprise move, Andrew Harding, the head of iron ore at commodities miner Rio Tinto Group has been passed over as CEO to replace outgoing Sam Walsh on July 2 by relative newcomer to the group, Jean-Sebastien Jacques who only joined in 2011 and has headed up Rio’s copper and coal divisions, the Sydney Morning Herald reports.

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Harding has been with Rio for 25 years and had been expected to replace departing Walsh in part due to his experience in iron ore which is central to Rio’s existence. The miner generates about half its revenues and around 90% of its earnings from iron ore sales, just 9% from aluminum and copper and the balance from diamonds and other minerals.

Rio Tinto’s Future

The move is seen as part of future plans for Rio to reduce reliance on iron ore and to divest itself of coal assets. Although the firm would argue otherwise — its cost of production for iron ore is a fraction of what it was five years ago — the firm’s expansion into an already oversupplied market is seen by many as a dead end.

Rio Tinto increased iron ore production by 11% last year to 327.6 million metric tons, and that should rise another 7% to 350 mmt by the end of this year, the Telegraph’s Questor column reports. The miner is not alone as rivals BHP Billiton and Fortescue also ramp up production to offset falling prices.

Source Telegraph

Source: Telegraph

This year, the policy appears to have paid dividends as Chinese demand has risen on the back of a short-term boost from a huge government backed loan splurge at the start of the year, but there are signs the economy there is slowing again. Read more

Brazilian mining company Vale SA will not financially support Samarco, a joint venture with BHP Billiton, if the company is not able to resume operations, Vale’s head of investor relations said on Thursday.

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Rogerio Nogueira told analysts at an event in Sao Paulo that he did not believe Samarco would need financial support, but that in the event its mine was unable to get permission to restart — there was a major disaster at the dam last year when a tailings dam failed last year —  Vale would not fund Samarco. The joint venture’s iron ore mine closed in November.

Vale received a favorable decision this week when a Brazilian judge ruled it would not have to defend itself against a $5.7 billion civil suit in the matter.

Huge inventory levels and increased production are not helping India’s iron ore mining sector.

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According to a recent report by credit rating agency ICRA, India’s iron ore prices are not likely to recover in the near future. On the other hand, steel companies would benefit from this development in the short term. They were likely to enjoy “better profitability” due to improved steel prices in the current year, supported by imposition of minimum import price (MIP) by the government.

Production Up, Prices Down

India’s iron ore production in 2015-16 was at 155 million metric tons, registering an annual growth rate of 23%, ICRA said in a statement. Much of the incremental production in iron ore was because of stepped up mining in the Indian state of Odisha. In the current fiscal, ICRA said, India’s iron ore output could be somewhere in the range of 170-175 mmt.

The Federation of Indian Mineral Industries (FIMI), on the other hand, was of the view though that the Indian iron ore export mining industry needed tax relief to compete internationally after an absence of approximately four years when mining was largely banned in many Indian states.

Speaking at an iron ore conference in Singapore recently, R.K. Sharma, Secretary-general of FIMI said it would “challenging” to restart some of the mines after they have been shuttered for four years.

According to ICRA Corporate Sector Ratings Senior VP Jayanta Roy, because of the substantial iron ore inventory levels at existing mines and the fact that India’s iron ore production was slated to increase further, domestic iron ore prices are unlikely to recover meaningfully in the near term, which benefits local steel mills.

Post minimum-import-price, Indian hot-rolled coil (HRC) prices have seen a sharp increase of about 25% from the lows reached in February 2016, according to ICRA’s quarterly research report on the steel industry. Industry players saw additional gains due to an increase in sales volumes, as imports were likely to reduce in the current year.

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The MIP is scheduled to expire in the second quarter of the India’s fiscal year (April 1 to March 31), but according to analysts, the present level of international prices and the extension of a safeguard duty by the Indian Government to March 2018, could continue to boost prices and prospects for Indian steel producers.

Steel shipments from the U.S. were largely unchanged from March to April and Brazilian police have alleged negligence was responsible for the Samarco disaster.

AISI Reports April Steel Shipments

The American Iron and Steel Institute (AISI) reported today that for the month of April, U.S. steel mills shipped 7,379,330 net tons, a very small increase of 0.03% from the 7,377,392 nt shipped in March, and a 4.1% increase from the 7,087,864 nt shipped in April 2015. Shipments on the year-to-date are 28,847,471 nt, a 0.7% decrease vs. 2015 shipments of 29,046,995 nt for four months.

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A comparison of April shipments to March’s shows the following changes: hot-rolled sheets, up 2%, cold-rolled sheets, up 2% and hot-dipped galvanized sheets and strip, down 2%.

Brazilian Police: Samarco Dam Was a Disaster Waiting to Happen

Brazil’s federal police, on Thursday, accuse mining company Samarco, a joint venture between Vale SA and BHP Billiton, of willful misconduct in relation to a deadly dam burst last November, saying the company had ignored clear signs the dam was at risk of collapsing.

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Police said Samarco had skimmed on safety spending, focusing instead on increasing production despite obvious indications, such as cracks, that the dam was in danger of a breach.

Steel markets painted an interesting picture in May. Chinese steel prices fell in May while US steel prices continued to skyrocket. Let’s explore this unusual divergent between Chinese and U.S. prices.

Raw-Steels_Chart_Jun-2016_FNL

Chinese Steel Prices Fall

This year we saw an improvement in steel market demand in China thanks to stimulus measures. Also, China, the world’s biggest steel producer, vowed to cut production capacity by 10-15% over the next five years.

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This combination boosted sentiment in the steel market and prices in China rose. However, as prices rose, the market questioned whether the price rally would hinder the country’s efforts to tackle that overcapacity problem.

And the market has good reason to have questions. Massive overcapacity in China’s steel industry has yet to shutter. While China’s crude steel output dipped 2.3% in 2015, production rose 0.5% in April compared to the same month last year.

Meanwhile, in May, government officials said that Beijing would continue to urge local governments to push forward steel industry capacity cuts and take reasonable measures to accelerate closures. China says that the capacity that has recovered is regular capacity, and not the one marked for closure. Certainly, If China falters on its commitment to reduce excess steel capacity, we could see that impact global steel markets, including U.S. But so far, unlike Chinese prices, U.S. prices didn’t tumble in May.

US Steel Prices Continue to Rise

The momentum in domestic steel prices continued in May. HRC prices rose by more than 20% just in the past four weeks. U.S. steel buyers will feel the price increase in their budgets this year unless, like our subscribers, they started hedging at lower prices earlier this year.

The price divergence between the U.S. and China comes down to imports. Steel imports into the U.S. were down in April. For the first four months of 2016 total and finished steel imports were down 34% and 33% vs. the same period in 2015. In addition, US steel producers seem reluctant to bring their idled capacity back online despite dried up import supply lines, particularly for flat-rolled steel products.

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This combination has left buyers in a short squeeze. Lead times for flat-rolled steel products have risen, allowing U.S. steel companies to raise their base selling prices.

What This Means For Metal Buyers

U.S. steel prices remain strong, but after the huge price gains seen this year, we wonder if, despite strong trade protections, domestic prices will suffer in the second half due to the ongoing global overcapacity issues and the recent correction in iron ore and Chinese steel prices.

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Iron ore has certainly been volatile so far this year. It jumped from the low $40s/ metric ton or 62% Fe fines on a delivered China basis to over $70/mt in April. It now stands at just below $50/mt.

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In percentage terms, those are big moves in a short period of time, but frankly at Steel-Insight, we find this irrelevant. In context, the recent moves don’t hold a candle to the fundamental shift in the product’s shift from $200/mt in 2011 to the current level. Now that was a generational change.

Iron Ore Monthly Average Prices ($/Metric Ton cfr China 62% Fe fines)

steel_insight_ironore_053016_350

Source: Platts

In terms of the monthly average price, which is what many steelmakers’ costs outside of China are linked to, the moves have been relatively small from around the low $40s to the high $50s. For steelmakers, even that $20/mt change in iron ore costs actually only add $30/mt to their total cost structure (around 1.5 mt of iron ore is required to make a tonne of steel).

Meanwhile, North American steelmakers have seen steel prices rise from $360/short ton for HR coil at the beginning of the year to current levels of $620/short ton. The fact that ore costs may have gone up $30/mt in that period is pocket change.

Not a Long-Term Concern

Moreover, the rapid change in prices has clearly been a short-term event. It was driven by a modest improvement in steel market demand in China. However, this was compounded by the massive liquidity boost to the Chinese market that was seen in Q1 this year that the Chinese government injected in order to stave off an excessive slowdown. That allowed steelmakers, which had been forced to idle in late 2015 due to lack of credit, to secure iron ore and return to steelmaking. Their buying drove modest gains in iron ore pricing.

However, the market was turbo-charged by retail Chinese investors. Responding to the rising price and also public statements from Chinese political leadership, vast amounts of speculative finance surged into iron ore futures in China. In one day in April, the turnover in volume on the Dalian iron ore contract exceeded the combined turnover of all equities trading in China with pricing up 19%. Upon tightening access to trading, this liquidity ebbed as did the price. The most volatile pricing moves were not, therefore, an indication of fundamental demand.

Supply/Demand Picture

Fundamentally, iron ore is going to be boring for the next five-plus years. There is simply too much supply available to a steel industry where global demand is not growing. We expect iron ore prices to hit the $30s/mt for a period in the second half of this year and stay there for an extended period, with pricing moving in the $30-60/mt range for the next five years, i.e. exactly the trading range that they have been in the for the last year.

That will mean more pain for global iron ore miners. For steelmakers and steel buyers, however? A long period of low prices will be welcome….and boring.

Steel-Insight is a steel industry price-forecasting publishing company, based in Toronto. James May, the firm’s managing director, has been a steel industry analyst for 15 years and advises some of the major global steel trading companies, steel producers and steel consumers on the outlook for steel pricing and industry trends. For more information, visit www.steel-insight.com.