While this year’s spectacular rebound in iron ore prices has been a godsend for the world’s biggest miners, it has not gone high enough for smaller, less-efficient producers that still have pits shuttered and equipment idle.
The price of the steelmaking material has nearly doubled in 2016 to above $80 a metric ton, a boon for miners such as Vale, BHP Billiton and Rio Tinto which extract the material at a cost of less than $20 per mt.
ABI Limps Out of 2016
Coming off a modest increase after two consecutive months of contraction, the Architecture Billings Index recorded another small increase in demand for design services. As an economic indicator of construction activity, the ABI reflects an approximate nine to 12 month lead time between architecture billings and construction spending.
The American Institute of Architects (AIA) reported the November ABI score was 50.6, essentially unchanged from the mark of 50.8 in the previous month. This score reflects a slight increase in design services (any score above 50 indicates an increase in billings).
One Australian miner is requesting Chinese steel mills pay a premium for its highest grade iron ore, a move that experts say will revive the once dormant pricing war.
According to a report from Reuters, Rio Tinto is the world’s No. 2 iron ore miner and demand from Chinese steel producers was at a six-year high when the annual pricing system collapsed. Iron ore supply issues are expected to reignite tensions between miners and mills over pricing.
“The steel market is so hot this year and they think it’s something that buyers can accept,” an anonymous source told Reuters. “If Rio gets it, other miners may follow.”
It is reported that Rio is looking for up to $1 per ton more than the index price for its Pilbara iron ore product on long-term contracts from Chinese mills for the year ahead. Rio was previously selling iron ore at a premium exclusively to traders.
Steel Prices on the Rise in Asia
Our own Stuart Burns recently wrote that the Asian market has seen steel prices rise due to much of the same dynamic that has pushed steel prices higher domestically. These movements suggest the trend will remain up for the remainder of the year.
How will steel and base metals fare for the remainder of 2016 and into 2017? You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:
The downward revision — equivalent to as much as $290 million at current ore prices — comes as the steelmaking commodity stages a recovery on the back of a surprise lift in demand from China.
U.S. Consumer Confidence Falls
Consumer confidence unexpectedly fell to a one-year low in October as Americans soured on the outlook for the economy amid a contentious presidential election campaign.
The University of Michigan preliminary index of sentiment declined to 87.9 from 91.2 in September, according to a report Friday. That was weaker than the lowest estimate in a Bloomberg survey of economists. Long-term inflation expectations declined to a record low.
Without doubt, much of iron ore’s gains in 2016 have been driven by strong demand from China, with imports up 9.3% to 669.65 million metric tons in the first eight months of the year from a year ago. But prices in Qingdao lost 5.8% in the seven sessions through Wednesday. That was the longest run of daily declines since March and while steel output remains robust, questions are again being asked how much longer prices can remain north of $55 per mt as yet more supply comes on stream. According to the MetalMiner index, finished steel prices have eased this month.
Iron Ore Output
You would expect the miners to refute this and, sure enough, in a Bloomberg report,Vale SA and Cliffs Natural Resources Inc. said that the impact of the new output won’t be as severe as expected and will see the $50 per mt level holding, but banking analysts are not so sure with Westpac saying last month rising supply will drive prices below last year’s lowest point of $38.30, while Citigroup expects an average of $45/mt next year. Read more
India will complete the second phase of its mining auctions later this month, after the first round last year received a lukewarm response. Going under the hammer will be gold, diamond and iron ore mines.
Mines in five provinces — Karnataka, Andhra Pradesh, Madhya Pradesh, Rajasthan and Jharkhand — will be auctioned. This time, there are 14 iron ore mines, 12 blocks of limestone and one block each of gold, diamond and copper. While some analysts have predicted a better response than last time to the iron ore mining auction, the limestone blocks may not see much action because of the cement market slump.
In the first round of the auction, the states offered 47 mines bearing minerals such as gold, iron ore, bauxite and limestone.
They were able to auction seven mines in that phase, earning the government billions of dollars over the next 50 years. However, 17 blocks were not sold due to an insufficient number of initial bids on account of factors such as quantity and grade of ore and low quality of the mineralization studies, among other reasons.
The first round also came under scrutiny when the comptroller and auditor general of India (CAG), a body that audits all government expenditures, passed certain adverse observations. It said in a report tabled in the Indian Parliament that competition may have been restricted in the auction of 11 coal blocks on account of multiple bids by corporate groups made through joint ventures or subsidiaries.
What Does This Mean For India’s Steel Exports?
The iron ore auction comes at a time when the Indian government is contemplating a relaxation of export duties on iron ore. This has led to protests from the domestic steel industry.
In a representation to the steel ministry, the Indian Steel Associationasked the government to continue with a 30% export duty on all grades of ore, to preserve natural resources for domestic use.
The government already cut the export duty on low-grade fines to 10% earlier this year but continued with a 30% levy on lumps.
US construction spending rose in July to the highest level in over 7 years as private construction outlays surged, providing another sign of solid economic momentum at the start of the third quarter.
Construction spending increased 0.7% to $1.08 trillion, the highest level since May 2008, the Commerce Department said on Tuesday. June’s outlays were revised up to show a 0.7% increase instead of the previously reported 0.1% gain.
Meanwhile, the monthly Construction MMI® – tracking the key industrial metals used in the construction sector – registered a value of 69 in September, a decrease of 4.2% from 72 in August, another all-time low.
Construction spending has increased for 8 straight months. Economists polled by Reuters had forecast construction outlays rising 0.6% in July. Construction spending was up 13.7% compared to July of last year.
Still, no matter how much the US construction sector booms – both residential and non-residential construction are hitting multiyear highs – prices are staying low mostly due to oversupply and a sharp decline in Chinese demand.
The monthly Raw Steels MMI® registered a value of 52 in September, a decrease of 5.4% from 55 in August.
In July, it seemed like steel prices were stabilizing for awhile, but prices fell again last month. The decline wasn’t as bad as it could have been, considering that last month China’s stock market sell-off continued and some industrial metals took serious hits.
The bearish commodity environment makes it hard to pick a bottom, proving once again that buying on weakness hasn’t been the best strategy for metal buyers during this market cycle.
Fundamentally, the steel story is similar to other base metals and can be summarized as: a glut of raw materials everywhere and weak demand unable to keep the market in balance, with China being the main driver on both sides of the equation. Read more
The monthly Raw Steels MMI® registered a value of 55 in August, a decrease of 1.8% from 56 in July.
After Chinese steel prices slumped in July, they fell again in August but were at least more stable. Domestic prices remain low but seem to be stabilizing as well, resulting in our raw steels index dropping by less than 2%. That’s a moral victory for steel these days.
Apart from this macro commodity weakness, the fundamentals within the steel industry don’t look much better. Chinese demand seems to be getting worse. Construction data shows that demand from the sector has slowed during this first half. Also, the automotive sector is weakening with vehicle sales falling year-on-year for several months. Read more
Metals and energy commodities, such as oil and liquid natural gas, continue to fall on international indexes mostly due to the weak economy and lax demand in China, the world’s second-largest economy. The recent volatility in Chinese stock markets shows no sign of abating.
The private Caixin/Markit manufacturing purchasing managers’ index (PMI) for China dropped to 47.8 in July from 49.4 in the previous month.
Chinese Economy Still Falling
That is worse than the preliminary reading of 48.2 and is the fifth consecutive month of contraction in the sector. With falling demand in such a large market, it is difficult to foresee a turnaround in the metals that make up our index. The Construction MMI® registered a value of 72 in August, a decrease of 2.7% from 74 in July.
While construction activity is strong in the US and Europe, emerging markets and China continue to drag down prices and overproduction of materials for export is actually exacerbating oversupply.
Try Not to Catch Falling Knives
The oversupply in aluminum, in particular, is worsening. Alcoa, Inc., recently raised its forecast for the global aluminum surplus, expecting a surplus of 760,000 metric tons this year which is almost double Alcoa’s previous forecast.
It remains a good time to be a buyer with double-digit declines in fuel surcharges and lower prices across the board for all construction products including rebar and H beams tracked in the index. With the price of oil back below $50 a barrel we are likely to continue to see falling US fuel surcharges and lower cost transportation and shipping charges.
Construction purchasing in the US is now a waiting game as estimators and project executives questions become some version of “how long do I wait before buying” to achieve a truly low price before markets bottom out, rather than how quickly to purchase to avoid non-existent price spikes.
Actual Construction Metals Prices
The weekly US Gulf Coast bar fuel surcharge fell 12.8% over the past month to $0.27 per mile. After falling 11.2%, the weekly US Midwest bar fuel surcharge finished the month at $0.27 per mile. Chinese H-beam steel prices fell 7.0% to $342.58 per metric ton. After rising the previous month, US shredded scrap prices dropped 6.8% to $261.00 per short ton. The weekly US Rocky Mountain bar fuel surcharge fell 5.8% over the past month to $0.29 per mile. A 3.1% decline for Chinese aluminum bar left the price at CNY 12,840 ($2,065) per metric ton. European 1050 aluminum fell 0.4% to $2,853 per metric ton.
The price of Chinese rebar rose 4.7% to $357.06 per metric ton after falling the previous month.
At a price of $77.20 per dry metric ton, the Chinese low price of 62% Australian iron ore fines did not budge the entire month.
The Construction MMI® collects and weights 9 metal price points used within the construction industry to provide a unique view into construction industry price trends over a 30-day period. For more information on the Construction MMI®, how it’s calculated or how your company can use the index, please drop us a note at: info (at) agmetalminer (dot) com.
The monthly Raw Steels MMI® registered a value of 56 in July, a decrease of 5.1% from 59 in June.
Chinese Market Reeling
Chinese steel prices are at their lowest level in more than 20 years. Chinese demand seems to be getting worse and industry analysts point out that the fall might not even be close to an end. This threatens the survival of smaller Chinese steelmakers, who are still reluctant to cut production in order to maintain cash flow and bank credit, while other small mills have already shut down.
Construction data shows that demand from the sector has slowed during this first half. Moreover, China’s demand for steel could take a further hit as construction eases over the summer.