• Industrial metal demand concerns due to fairly weak macro-economic data from Europe and China
• Fundamentals in the steel sector in most other regions are still relatively poor, while….
• … solid fundamentals and tightness in base metals still provide a positive view for prices for 2014
Steel, copper prices under pressure from the start of 2014
Prices in the ferrous industry have decreased sharply, especially in the area of steelmaking raw materials. The price of iron ore has already dropped by 36% since 1 January and hard coking coal prices fell 23%. In both markets, oversupply is currently the main concern, which depresses prices. Global HRC prices, on the other hand, reported a single-digit drop, which – in theory – should be beneficial for margins. According to CRU data, Chinese steel mill EBITDA margins have been relatively thin to negative. However, conditions started to turn from the beginning of the third quarter. Prices for both global HRC and coking have stabilised, while iron ore prices have weakened further and registered a 9% price drop since 1 July. There seems to be little producer discipline and miners continue to ramp up iron ore output, which doesn’t help the oversupply situation. Global iron ore miners – with high economies of scale and a relatively low position on the cost curve – adopt this strategy in order to lower market prices and eventually push out the high cost capacity globally. At the same time, buyers of iron ore in China are confronted with tighter credit conditions, which also limits purchasing activity. In the base metal complex, copper is the only metal whose price has declined since the start of 2014. Aluminium, nickel and zinc prices increased as both supply and demand conditions are relatively better for these three metals. However, fundamental changes in copper – with decreasing stocks at LME warehouses – meant a continuation of the downward price trend. Since the start of Q3, aluminium prices staged significant gains, making it the best performing metal. Copper and nickel suffered some pressure due to geopolitical issues, regulations and surprisingly weak macro-economic data from Europe and China. Aluminium and zinc are therefore the bright spots so far.
Room for improving steel prices?
So far, this has not been a very positive year for steel sector prices. Demand is weak, supply is abundant and – as a result – prices have decreased in most regions. Prices in the CIS and the US have remained stable compared to the level of 1 January, while steel prices in (both southern and northern) Europe and China have dropped. However, prices in Latin America increased by 3.5% from their 1 January levels on buoyant demand. Meanwhile, since the start of Q3, there seems to be some room for improvement and a degree of cautious optimism globally. Unfortunately, prices in Europe have continued to soften, but seem to be bottoming out in all other regions and we are seeing price stability and/or mild increases. This is not surprising, because September generally marks the start of improving demand just after the summer lull. Still, global manufacturing activity is improving and the construction sector is picking up speed, especially in the US where prices are expected to increase further as a result. However, stronger steel demand in the US could trigger cheaper steel imports from abroad, which could have a dampening effect on domestic US prices. Fundamentals in the steel sector in most other regions are still relatively poor. Chinese investments in the property sector are weakening, which is leading to relatively soft steel demand. In Europe and Latin America, macro-economic conditions have deteriorated, and in the end this will also affect the steel sector. Therefore, we do not expect any significant gains in steel prices during Q3 and will have to wait for some minor improvements in Q4.
Fundamentals supportive for base metal markets
Solid fundamentals and tightness in base metal markets (especially in China) encourager a positive view on prices for this year. Conditions have improved on several fronts for the base metal complex. Since the start of this year, total volumes of LME stocks have dropped by 14%, while the weighted base metal price managed to increase by 4% in the same period. Speculative demand by investors remained stable, which suggests that investors still have some confidence in global economic growth and metal demand going forward. In addition, China’s base metal balance is characterised by more deficits than surpluses this year. There will be sufficient aluminium in the Chinese market, while the balance for copper, nickel and zinc will probably be negative. Lately, investor base metal demand seems to have a stronger influence on price developments than fundamentals and this suggests that base metal prices will remain volatile going forward. And, as we stated previously, risks have increased (due to worries about European economies, sluggish Chinese (import) metal demand and geopolitical tensions), which will influence prices and add to price volatility going forward. We expect aluminium and zinc to remain the best performing metals in the second half of this year. Aluminium demand will continue to be solid. On the other hand, overcapacity persists in the aluminium sector in China, but is expected to fade slowly. Zinc prices are also expected to increase further due to a decrease in production growth figures from existing mines and the prospect of mine closures, combined with limited new large mining projects in the pipeline and suspended mining on start-up problems with greenfield projects. And while the nickel market remains in a wait-and-see mode, we expect that copper demand (especially from China) will remain solid this year.