Metals & Mining

Fri, 02/12/2010 - 10:34

In this week's Interfax guest column, Ma Zhongpu, an analyst with Custeel, discusses the outlook for China's iron ore supply in 2010. Translated from the original Chinese by Xu Hong.

By Ma Zhongpu

In this week's Interfax guest column, Ma Zhongpu, an analyst with Custeel, discusses the outlook for China's iron ore supply in 2010. Translated from the original Chinese by Xu Hong.

Shanghai. February 11. INTERFAX-CHINA - Steel product prices rose steadily for around two months from October 2009, and the price of imported iron ore increased accordingly. The average reference CIF (cost, insurance and freight) price for iron ore jumped from less than RMB 700 ($102.53) per ton to over RMB 1,000 ($146.48) per ton during the period, while the average reference CIF price for Indian iron ore grading 63.5 percent hit a high of $135 per ton.

As a result, a number of international research institutes modified their original forecasts that the 2010 long-term contracted iron ore benchmark price, between the three iron ore giants and Chinese steel mills, would rise by more than 20 percent from the 2009 price agreed with Japanese steel mills. On Jan. 18, Goldman Sachs estimated that the benchmark price would grow by 35 percent. Merrill Lynch also raised its forecast to 50 percent.

However, the uptrend did not last and steel product prices started to slide from late January 2010 due to large stockpiles. As a result, the falling steel product prices brought down the spot Indian iron ore price, which stands at less than $130 per ton at present, still higher than the price of domestically produced iron ore.

Chinese steel mills, especially private enterprises, are suffering from increasing production costs, which is likely to lead to a drop in imported iron ore prices in the near future. Both Merrill Lynch and United Bank of Switzerland expect that China's crude steel output and price will rise in the first half of 2010, which I find hard to believe. If the long-term contracted iron ore price rises by between 35 percent and 50 percent and steel product prices continue to slide, many domestic steel mills may face difficulties.

In 2009, several emerging markets such as China experienced relatively high economic growth and strong steel product demand, while other parts of the world struggled with the economic slump. Crude steel output from the European Union decreased by 29.7 percent year-on-year, while the United States and Japan witnessed a 36.4 percent and a 25 percent drop respectively on an annual basis.
Although the global crude steel output recovered rapidly in the fourth quarter of 2009, this was not driven by market fundamentals, but by purchases to replace and supplement stockpiles. The European Union expects that its crude steel output will return to pre-crisis levels by the second quarter of this year. However, it is generally believed this will not occur until the third or fourth quarter.

The global economy, as well as the global steel industry, has yet to fully recover from the economic downturn, and steel product demand and prices remain in the doldrums. Therefore, I anticipate that steel product prices will remain low at least in the first half of 2010, which will restrict iron ore prices. Recently, Raw Materials Group (RMG), a Swedish consulting company, predicted that this year's long-term iron ore price in Europe would rise by between 5 percent and 15 percent, while the average global iron ore benchmark price will increase by 10 percent to 15 percent. This is far below previous market predictions that the long-term iron ore price would increase by up to 50 percent in Asia. In effect, it means China alone cannot support a strong global iron ore price.

Last year, the Chinese government's massive stimulus package boosted the domestic metals industry. The country's crude steel output in 2009 increased by 65 million tons from the previous year, while imported iron ore reached 628 million tons. However, the rises were not only driven by the increased demand for iron ore on the domestic market, but also due to market speculation, which caused a surge in stockpiles when prices were low.

In 2010, the Chinese government is expected to continue to support steel product consumption. As the price of imported iron ore is higher than domestically produced iron ore, domestic iron ore miners are likely to ramp up production, which will alleviate China's iron ore supply shortage this year. Looking ahead, the growth rate of China's steel industry is expected to slow down in 2011. Overall Chinese iron ore miners will expand annual production by 30 million to 40 millions tons, while Chinese steel mills will try to diversify their overseas iron ore suppliers, in order to reduce dependence on the global iron ore giants.

The above is a personal opinion piece by the author. Its publication in no way implies that Interfax shares the views expressed in the article.