US Steel Market Diverging, Baosteel Raising Prices

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Ferrous Metals

The US market is leading GDP growth among developed nations and, in the process, diverging from the global steel market to the benefit of steelmakers – but to the detriment of consumers. First, what’s happening overseas?

In Asia, both iron ore and coking coal prices have been falling – indeed, the forward curve for iron ore on Singapore’s SGX dipped under US$130/dry metric ton for the January contract for the first time on Thursday, Jan. 9 and currently trends downwards along the curve to under US$120/dmt by May this year, the Steel Index reports.

Iron ore, as measured by TSI’s 62% Fe benchmark price for Chinese imports, has traded in a remarkably stable band of $130-140/dry metric ton since Aug. 16, 2013. An almost unprecedented period of stability for recent years, but a combination of issues has impacted demand, leading to a fall in prices even as bad weather has hampered supply, an issue that would normally have supported prices.

FREE Download: The Monthly MMI® Report – covering the Steel/Iron Ore markets.

Standard Bank blames the drop in demand on persistently high borrowing costs; lower winter construction demand; nervousness over property market changes and the upcoming Chinese holidays.

Last week, Chinese iron ore port stockpiles rose 2.14 million tons week-on-week, while weekly shipments from Australia and Brazil dropped by a huge 9mt to 9.5mt. China imported a total of 820.3mt of iron ore in 2013, up 10% year-on-year, with Chinese steel output likely to have reached 775mt last year, up from 720mt in 2012.

CISA predicts China will produce 800mt in 2014 and iron ore imports will continue to rise accordingly.

In the short term, some softness in steel prices has been seen with billet and rebar prices being reduced by some producers, but on the whole, prices have remained fairly level. Baosteel, China’s largest producer, actually increased list prices in both January and February, citing stronger auto demand as one reason.

As Standard Bank points out, China is believed to have built 22 million cars in 2013 with a further 14% growth expected in 2014, in addition to plans to build 6,600 kilometers of new rail lines. Although growth in steel production has all but come to a halt, this may be a temporary lull ahead of the Chinese New Year. Many of Standard Bank’s reasons for the slowdown will be resolved by the spring; warmer weather, clarity in government policy and possibly an easing of the current artificially induced credit squeeze would see a rise in activity and steel production.

Even so, the lack of discipline in the Asian market will probably mean mills are unable to capitalize on the benefits of falling raw material costs to increase margins as they have in the US.

What This Means for Metal Buyers

Closing capacity and rationalizing assets has allowed the more disciplined US producers to improve profitability even as they struggle with higher scrap costs. As a result, the spreads between US prices and the rest of the world have increased, TSI states, creating a magnet for European and Asian steel producers facing overcapacity and weak sales at home.

To a limited extent, the US import market has been shielded by a weaker dollar, against the Euro and against the RMB, which, officially pegged at 6.0951 and with spot trading at 6.0424, is the highest since July 2005. But continued strength in US prices and a realization by the markets that the dollar should be higher than it has been of late could see imports pick up this year.

Meanwhile, producers should enjoy the fruits of their disciplined approach – they have started 2014 in the best shape for some years.

FREE Download: The Monthly MMI® Report – covering the Steel/Iron Ore markets.

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