Steel sector recovery slow to materialise

by: Casper Burgering

In this publication: US confidence indicators weakened, but labour market data are still relatively good. The base metals market balance points to shortages, which has a price inflationary effect. Steel price expectations not high due to ample supply.

Industrial Metals Monitor-June 2017.pdf (378 KB)
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Sentiment about US economy under pressure

The three largest economic regions – the US, the eurozone and Asia – jointly account for about 80% of global metal consumption. Within these regions, we see economies developing at different speeds. The eurozone economy is doing well, while many economies in Asia (notably China) are on a more stable economic growth trend. In the US, sentiment has recently come under more pressure from relatively poor macro data. Many confidence indicators have weakened, industrial output growth was disappointing and consumer spending was lower. Some parts of the US economy are doing well, however. Labour market data demonstrate that the number of vacancies is continuing to grow and that applications for unemployment benefits are relatively low. On balance, ABN AMRO believes that the US economy will continue to develop well this year and that the recent poor figures are just some noise.

Copper price follows trends in Chinese economy

China will continue to put its stamp on the trends in industrial metal prices for the time being. The country has a share of 35% in global copper production and as much as 49% in copper consumption. Given that comparable shares are found in other industrial metals, China remains a dominant factor of great importance. Owing to China’s close interrelationship with metal markets, economic developments there play an above-average role, with trends in the domestic metal sector also a key factor. And this relationship is much stronger than, for instance, the economic trends in the developed economies. Trends in end use in China are relevant as well. Industry, a major end user of copper, is an early-cycle sector and has a strong relationship with cyclical developments. The volatility in industrial indicators, such as the purchasing managers index (PMI), investments in energy and industrial output thus have a direct impact on the price of industrial metals. However, precisely now that the economy in China is stabilising and sentiment is picking up, the copper price is lagging behind.

Iron ore and coking coal prices sharply lower

The pressure on prices for the raw materials for steel manufacturing (iron ore and coking coal) has never been greater since the start of 2017. In both markets, supply is currently more than sufficient to meet the relatively weak demand from steel plants and this is putting a damper on prices. Steel prices are under much less pressure, resulting in improving margins for many steel plants. Price trends within the base metal markets are diverse. Aluminium, copper and zinc prices have held up at a higher level since the start of 2017, while nickel prices are lower. Nickel faces the greatest pricing pressure. This is down to political decisions in Indonesia and the Philippines, two countries with substantial nickel stocks. Less stringent regulation is spurring worldwide supply, which is squeezing the price. The prospect of aluminium capacity cuts in China this year is driving prices up.

Premiums for direct nickel delivery are rising

The premium for direct delivery is the price that buyers must pay – on top of the LME price – to receive the material relatively quickly at a specific location. The premiums include transport, insurance and service charges. The level of the premium also relates to the availability of the metals in the market. A higher premium usually signals a lower availability of the material and vice versa. The trends in these premiums show that the availability of aluminium, copper and zinc are still relatively good. Market expectations do not suggest that premiums for these three base metals will rise sharply in the short term. The current spot market transactions in Europe are still too low for that. Nickel premiums have risen more sharply since the start of 2017 due to a shortage of Russian material in the nickel market and the limited availability of briquettes in the spot market.

Fundamental factors signal upward price trend

The balance between supply and demand is a key indicator for assessing the long-term price trends of the various metals. Clearly, the price trend and market balance do not always have a one-on-one relationship, but at least it provides a tangible indication of the possible direction. For the coming years, many base metals appear to be heading towards a negative market balance, indicating that demand for the relevant metal will outstrip supply in volume terms. This will drive up prices. The zinc market balance will show a surplus in 2019, although the volume will be relatively low. However, dynamics in base metal markets are strong and numerous other indicators – both cyclical (such as trends in the Chinese and US economies) and fundamental (such as supply from mines and stock levels) – will also influence the price trend. Base metal stock levels will support the price in the coming years, as stocks in weeks-of consumption terms are decreasing.

Steel output and iron ore stocks in China rise to peak levels

Based on monthly Chinese iron ore imports, we can estimate the tonnages of steel that will be produced from this quantity of iron ore. This estimate shows that, during 2017, China can produce much more steel with the quantity of imported steel than is reflected in the official data so far. As a result, Chinese stocks of iron ore increased in June to new peak levels. The availability of iron ore is more than sufficient to meet domestic demand. And with the quiet summer season coming up, the likeliest scenario is that demand for iron ore will remain weak – because the ample availability means that the restocking activities of steel plants will stay subdued. But the price of iron ore is now low, making this a good time for China to buy given that China will remain dependent on iron ore supplies from abroad in the long term, as the country lacks high-quality iron ore of its own.

Expectations for scrap prices not high

As in Europe, steel prices have also lost ground in China since mid-April. The steel plate price in Europe has dropped by 11% since April, while the price in China shed 8%. Since mid-May, however, the steel plate price in China has started to recover, gaining 4%. The trends in steel plate and scrap prices show a parallel movement, but at different levels. Scrap prices in China have declined by 10% since April, while the scrap price in Europe fell 5%. Expectations for scrap prices are not high. In China, the government’s main aim is to reduce induction furnace capacity. Scrap metal is the main raw material for this method of – small-scale and often illegal – steel production, so any fall in output will push down demand for scrap. This will keep the prices for scrap low in China in the coming period. The absence of stronger growth in steel demand will ensure that the price remains stable in Europe.