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Bulk Buys: Fitch has bearish take on steel markets but there could be second half upside
Mining
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Try predict what commodity prices will do, and iron ore in particular, and they will make a fool of you.
That’s what analysts, economists and forecasters do without any real sense of certainty, especially given the opaque nature of the Chinese demand that underpins interest in the commodity.
Any number of predictions have been proven right, then swiftly proven wrong in a volatile market over the past couple of years. It’s a situation that has prompted Federal and State Treasuries to go ultra-conservative in their estimates, desperate not to be caught out by a sudden slip in prices.
Only a month ago Goldman Sachs, Citi, the Big Banks and more were placing their chips on Chinese steel demand faltering and iron ore prices falling.
Then reports of Chinese property market support came flying through the door and traders sent prices surging back to more than US$110/t.
Singapore futures for 62% Fe iron ore — the benchmark grade for mid-grade fines — were tracking at US$113.35/t yesterday afternoon, hardly the signs of a commodity in crisis.
But underpinning iron ore demand is always steel demand and pricing. If prices fall too low, mill margins go negative. That prompts steel factories to go into maintenance, calming demand for the raw commodity sold at a rate of over 900Mtpa out of the Pilbara.
What is happening with steel globally? Commodity analysts at Fitch have a warning that prices will be lower than previously thought, as China’s post-Covid recovery fails to hold the power many thought it would.
What do they say?
Fitch had held a global average steel price target of US$825/t previously, but has severely trimmed its year average to US$730/t with physical demand described as “tepid”.
The global average price longs and flats like reinforce bars has been around US$751/t up to June 6, with the average for all products YTD at US$713/t.
There is some hope. Fitch says steel prices should be higher in the coming months, giving some respite to factory owners concerned by high input prices for iron ore and coking coal.
“We expect a pick up in the global average in the coming months from current levels, driven mainly by the bottoming out of Mainland China’s construction sector that we anticipate before the end of the year,” Fitch says.
“Despite a recovery in the Mainland Chinese economy, physical demand for metals including steel has been tepid at best as growth is being led by the service sector.
“Manufacturing PMI peaked in February at 52.6 but has since been on a decline, entering contractionary territory in April at 49.2 and further deteriorating to 48.8 in May.”
The big bugbear in China is real estate, where the key figure for market watchers is construction floor space.
“The real estate sector in China continues to grapple with challenges. From January to April 2023, new construction floor starts contracted by 21.2% y-o-y, having contracted by 19.2% y-o-y during January to March, signaling a larger decline in April,” Fitch notes.
“That being said, Mainland China is likely to roll out additional policy support measures for the sector in the coming weeks, which will boost demand for steel. This support, combined with plans to limit crude steel production to 2022 levels of 1.018bnt, will help stabilise prices in H2 2023.”
What about longer term?
There are risks there. China is heading into a normally weaker construction period over the next three months.
However, supply globally is expected to be weak, with production flat year on year from January to April and Fitch expecting a floor in prices with Russia and Ukraine, 5th and 12th in terms of output, both seeing big drops amid the ongoing war.
In the medium to longe term Fitch sees prices rebounding next year to US$780/t before slowing to US$700/t from 2025 to 2027.
“Ultimately, we expect that a combination of slowing Chinese steel consumption growth and rising global steel market protectionism prompting greater production in affected countries to loosen the market and drag prices lower in the medium term,” they said.
“Chinese domestic demand for steel will continue to slow overall in the coming decade compared to the last as the rebalancing of the economy away from heavy industry and towards the service sector resumes in the wake of the collapse of the property market bubble, which will drag down domestic steel prices in China and the global average.”
The great hope is India, the US and emerging markets.
But Fitch does see a ‘paradigm shift’ coming where green steel processes like electric arc furnaces begin to take market share from blast furnaces.
That is good for companies who produce ultra high grade iron ore like Grange Resources (ASX:GRR) and Champion Iron (ASX:CIA), given outside of scrap steel — not in high enough supply to make a dent into the world’s steel consumption — only very high grade products can be utilised in DRI and EAF processes.
Could WA finally become a (green) steel producer?
To that end the WA Government has thrown down the gauntlet to the State’s industry to turn from digger and shipper to steel producer in a new report led by the Minerals Research Institute of WA.
Mines Minister Bill Johnston says a small vertically integrated hot briquetted iron plant in the Pilbara utilising a local magnetite feedstock could generate $31.7b in taxation benefits through 2050.
“It is estimated that the 4.8Mtpa plant would increase employment in the Western Australian iron ore sector by 1,700 full-time employees,” Johnston said.
“The Cook Government now has a comprehensive understanding of the challenges facing the steel industry in its decarbonisation efforts and opportunities for future value adding of iron ore in Western Australia.
“The transition option of using natural gas has the potential to reduce emissions from iron making by 65 per cent and is technically feasible today. This information can be used to support investment attraction into Western Australia.
“There is increasing interest in Western Australia by the steel industry given the access to our iron ore resources and renewable energy options. Coordinated efforts will be required to secure that investment.”
It should be noted the capex for this theoretical facility is steep and there are some logistical nightmares for any proponent who digs into the fine print of the study.
The mining, pelletisation and shaft furnace collectively would cost around $7 billion, then there’s $20.7 billion of renewables, and $3.67b for a hydrogen facility that could produce 325,000t per year.
The cost of hydrogen would need to fall substantially as well, to a ‘stretch target’ of US$2/kg. It’s currently in the $7/kg neighbourhood. Natural gas (WA has a lot of this, not just the kind created by pollies and bureaucrats) could be tapped in the interim.
But domestic emissions from the iron ore production process would also be much higher than conventional hematite production — a potential fivefold increase — posing a regulatory and PR challenge onshore.
Once Scope 3 emissions from the steelmaker are taken into account, the overall emissions from the production of steel using the Aussie HBI would be less than half of the 2.06t of CO2 produced for every tonne of steel through the hematite to blast furnace route.
The savings globally run up to 56-59%, according to the study. Would the increased domestic emissions be a palatable trade off?
Best of luck to you all.
| CODE | COMPANY | PRICE | 1 WEEK RETURN % | 1 MONTH RETURN % | 6 MONTH RETURN % | 1 YEAR RETURN % | MARKET CAP |
|---|---|---|---|---|---|---|---|
| ACS | Accent Resources NL | 0.011 | 10% | 10% | -56% | -82% | $ 5,204,400.11 |
| ADY | Admiralty Resources. | 0.008 | 60% | 33% | 14% | -33% | $ 9,125,054.07 |
| AKO | Akora Resources | 0.175 | -10% | 3% | -5% | -22% | $ 16,621,992.45 |
| BCK | Brockman Mining Ltd | 0.03 | -3% | -9% | 30% | -19% | $ 278,406,963.93 |
| BHP | BHP Group Limited | 46.72 | 4% | 6% | 2% | 10% | $ 233,534,327,631.60 |
| CIA | Champion Iron Ltd | 6.36 | 1% | -1% | -9% | 5% | $ 3,268,660,556.32 |
| CZR | CZR Resources Ltd | 0.17 | 6% | 0% | -26% | -40% | $ 38,896,216.59 |
| DRE | Dreadnought Resources Ltd | 0.055 | 2% | -5% | -40% | 31% | $ 169,714,139.22 |
| EFE | Eastern Resources | 0.011 | 0% | 0% | -58% | -52% | $ 13,661,411.07 |
| CUF | Cufe Ltd | 0.011 | 0% | -8% | -24% | -54% | $ 10,627,236.02 |
| FEX | Fenix Resources Ltd | 0.255 | 9% | 9% | 9% | -18% | $ 154,802,908.80 |
| FMG | Fortescue Metals Grp | 22.4 | 8% | 9% | 11% | 20% | $ 68,753,286,618.94 |
| FMS | Flinders Mines Ltd | 0.42 | -8% | -9% | 11% | 2% | $ 70,072,159.46 |
| GEN | Genmin | 0.145 | 0% | -9% | -32% | -15% | $ 60,923,236.59 |
| GRR | Grange Resources. | 0.56 | 5% | -3% | -33% | -61% | $ 619,176,203.43 |
| GWR | GWR Group Ltd | 0.069 | 3% | -4% | 6% | -24% | $ 22,163,949.20 |
| HAV | Havilah Resources | 0.235 | -10% | -13% | -27% | -13% | $ 74,410,214.35 |
| HAW | Hawthorn Resources | 0.14 | 47% | 100% | 27% | 47% | $ 43,552,029.69 |
| HIO | Hawsons Iron Ltd | 0.043 | 16% | -4% | -52% | -90% | $ 40,439,126.60 |
| IRD | Iron Road Ltd | 0.079 | -2% | -16% | -39% | -47% | $ 62,937,534.82 |
| JNO | Juno | 0.075 | 7% | 0% | -17% | -46% | $ 10,310,008.08 |
| LCY | Legacy Iron Ore | 0.021 | 31% | 50% | 17% | 5% | $ 140,950,176.38 |
| MAG | Magmatic Resrce Ltd | 0.08 | -12% | -41% | 0% | 25% | $ 26,900,966.22 |
| MDX | Mindax Limited | 0.061 | -13% | -36% | 3% | 3% | $ 132,961,320.70 |
| MGT | Magnetite Mines | 0.41 | -1% | -15% | -34% | -64% | $ 31,093,665.69 |
| MGU | Magnum Mining & Exp | 0.024 | 0% | -4% | 26% | -43% | $ 16,541,688.02 |
| MGX | Mount Gibson Iron | 0.465 | 16% | 11% | -11% | -22% | $ 570,777,086.51 |
| MIN | Mineral Resources. | 74.06 | 6% | -3% | -9% | 43% | $ 14,251,786,694.32 |
| MIO | Macarthur Minerals | 0.2 | -9% | 29% | 43% | -13% | $ 33,130,697.60 |
| PFE | Panteraminerals | 0.08 | 11% | 0% | -33% | -38% | $ 3,965,586.24 |
| PLG | Pearlgullironlimited | 0.03 | -6% | 0% | 37% | -43% | $ 4,692,487.14 |
| RHI | Red Hill Minerals | 4.45 | -4% | -5% | 10% | 41% | $ 284,035,263.05 |
| RIO | Rio Tinto Limited | 117.4 | 2% | 7% | 2% | 10% | $ 43,294,947,038.82 |
| RLC | Reedy Lagoon Corp. | 0.005 | 0% | -17% | -50% | -72% | $ 3,400,317.61 |
| CTN | Catalina Resources | 0.0035 | 17% | -13% | -56% | -56% | $ 4,334,704.12 |
| SRK | Strike Resources | 0.062 | -7% | -13% | -26% | -48% | $ 18,443,750.00 |
| SRN | Surefire Rescs NL | 0.014 | -13% | -30% | 17% | -30% | $ 24,770,452.16 |
| TI1 | Tombador Iron | 0.019 | -10% | -10% | -21% | -32% | $ 42,992,147.46 |
| TLM | Talisman Mining | 0.18 | 6% | -10% | 33% | 33% | $ 33,897,662.82 |
| VMS | Venture Minerals | 0.015 | 0% | -21% | -38% | -52% | $ 27,300,182.49 |
| EQN | Equinoxresources | 0.13 | 4% | -7% | -7% | -28% | $ 5,400,000.12 |
| AMD | Arrow Minerals | 0.003 | 0% | -25% | -25% | 0% | $ 9,071,295.29 |
Thermal coal continues to stay mellow
A little bump for thermal coal last week as European gas prices temporarily surged. That didn’t last long.
Prices remain well down on their year end level of US$394/t, with front month Newcastle futures trading at US$132.80/t.
That is despite volumes from the Port of Newcastle expected to hit a multi-year low this financial year.
As discussed by WoodMac’s Rory Simington in this column last week, volumes for the calendar year for Aussie thermal coal exports should be much higher however than 2022’s lows of 178Mt.
That came about due to the impacts of the recent La Nina, with wet weather cutting supply to major ports.
Coking coal prices lifted slightly on Monday to US$229.5/t, with steel making coal now enjoying a big premium to energy coal.
| CODE | COMPANY | PRICE | 1 WEEK RETURN % | 1 MONTH RETURN % | 6 MONTH RETURN % | 1 YEAR RETURN % | MARKET CAP |
|---|---|---|---|---|---|---|---|
| NAE | New Age Exploration | 0.005 | -17% | 0% | -38% | -29% | $ 8,615,393.46 |
| CKA | Cokal Ltd | 0.115 | 0% | -18% | -44% | -8% | $ 124,079,132.70 |
| BCB | Bowen Coal Limited | 0.16 | -3% | -24% | -47% | -54% | $ 328,267,723.84 |
| SVG | Savannah Goldfields | 0.11 | -21% | -27% | -37% | -31% | $ 22,522,570.37 |
| GRX | Greenx Metals Ltd | 1.005 | 18% | 28% | 76% | 415% | $ 251,613,972.66 |
| AKM | Aspire Mining Ltd | 0.062 | 2% | 17% | -16% | -29% | $ 30,965,856.09 |
| AVM | Advance Metals Ltd | 0.007 | -13% | 0% | -13% | -22% | $ 4,119,911.08 |
| AHQ | Allegiance Coal Ltd | 0.013 | 0% | 0% | -67% | -97% | $ 13,063,647.08 |
| YAL | Yancoal Aust Ltd | 4.54 | -3% | -15% | -29% | -14% | $ 6,047,612,621.46 |
| NHC | New Hope Corporation | 5.39 | 0% | 5% | -17% | 47% | $ 4,764,929,247.00 |
| TIG | Tigers Realm Coal | 0.006 | -14% | -14% | -63% | -67% | $ 65,333,511.84 |
| SMR | Stanmore Resources | 2.63 | -2% | -6% | -1% | 20% | $ 2,397,701,746.44 |
| WHC | Whitehaven Coal | 6.78 | 6% | -1% | -36% | 36% | $ 5,886,500,043.66 |
| BRL | Bathurst Res Ltd. | 0.89 | 1% | -8% | 8% | -26% | $ 163,612,611.90 |
| CRN | Coronado Global Res | 1.545 | 12% | 6% | -22% | -6% | $ 2,523,062,863.65 |
| JAL | Jameson Resources | 0.06 | -14% | -20% | -40% | -20% | $ 23,490,666.00 |
| TER | Terracom Ltd | 0.44 | -6% | -28% | -52% | -38% | $ 352,425,143.40 |
| ATU | Atrum Coal Ltd | 0.005 | 0% | 0% | -17% | -25% | $ 6,958,495.86 |
| MCM | Mc Mining Ltd | 0.14 | 4% | -18% | -42% | 60% | $ 55,953,128.28 |
| DBI | Dalrymple Bay | 2.7 | 2% | 6% | 9% | 30% | $ 1,338,556,500.90 |
| AQC | Auspaccoal Ltd | 0.135 | 4% | -23% | -45% | -16% | $ 52,096,642.95 |
