Material Matters: Coal, Iron Ore, Steel And Nickel

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-Hopes of more stable coal prices
-BMA to ramp up coking coal production
-Iron ore price unlikely to ease this year
-Anti dumping having an effect on Oz steel
-China circumvents proposed Indonesian ban
 

By Eva Brocklehurst

Seaborne coal prices are now at levels that are considered below the break-even point for many producers. JP Morgan has reviewed the international coal market and believes that Australian imports to China are not looking economic and Indonesian imports are vulnerable while miners delay waste stripping to fit costs into sales prices. Meanwhile, the Atlantic coal market is well supplied.

Based on the stabilising of price profiles for both seaborne thermal and coking coal, the worst could be over for the coal miners. Despite this, the market overhang will prevent a rapid recovery in margins and miners will have to continue working on cost reductions. Also shipping costs have jumped and this has put some additional pressure on producers. New coal infrastructure that was built over the last five years is ready to roll, and this could keep the coal market well supplied until take-or-pay contracts roll off, or some producers are forced to leave the sector. The analysts are positive about the longer term outlook for seaborne coal, as developing nations seek to grow with affordable power, but expect the sector will struggle with oversupply if there is no sharp increase in demand.

Meanwhile, the Big Australian wants its coking coal profits back. That's JP Morgan's interpretation of the plans by BHP Billiton ((BHP)) and Mitsubishi Alliance (BMA) to fully utilise installed capacity. To do this production growth of around 30mt is planned by 2014. Australian floods in 2011 plus labour problems in 2012 limited Australian coking coal production and exports. This allowed US producers to more than double exports. JP Morgan observes that US coking coal exports jumped from a typical 30mtpa to a peak of 64mtpa in 2011, when Australia's coking coal mines suffered from flooding. Australia's miners were slow to recover but now they're back with a vengeance. The broker believes US coal producers will have to reduce exports of coking coal as Australian volumes crank up. On the thermal coal side, this is well supplied but with US utility inventories falling quite quickly JP Morgan is hopeful of a more stable market in 2014.

Even though the coking coal price has eased, JP Morgan expects steelmakers to continue working with technologies to make best use of quality coking coal. The analysts suspect they will think harder about the total cost of blending component coals as well as consider the reliability of supply. As a consequence, PCI/anthracite and direct reduced iron projects are expected to gain ground against hard coking coal.

Iron ore prices are holding above US$130/t CFR China in the face of increasing supply from the major producers. Even Macquarie had anticipated more of a pullback in prices after the July-August re-stocking rally. The broker notes that the level of iron ore inventory held by the mills is lower than previously thought and, factoring in a seasonal re-stocking, this implies prices still have the potential to rally before the year ends. Macquarie believes the Mysteel data of iron ore inventory at mills is a useful indicator for understanding short-term prices. The survey covers 64 mills that have less than 5mtpa capacity. This is a sample of marginal buyers that the broker estimates covers 35-40% of China's steel production. Based on Macquarie's analysis of the data, the level of inventory held by mills is lower relative to the historical average. This could explain why purchasing activity has stayed stronger than expected.

The mills appear to have shifted to a much leaner approach to inventory, but they still need to hold certain levels. Based on Macquarie's forecasts for production, re-stocking to a similar level achieved last year ahead of the northern hemisphere winter stock reductions would require a further 11mt build-up. Supply over the September quarter was stronger than the broker had estimated as Australia, in particular, showed a strong uplift in shipments. A further 32mtpa is expected in Australia's output. Macquarie finds support for prices in the high US$130/t area, as an average and is less confident in a near-term retracement in iron ore prices. While October may be somewhat muted, the analysts expect prices to finish this year comfortably above the current level.

The view of the Australian steel market going into 2014 is one of cautious optimism. Macquarie attended the independents' steel market conference, which comprises customers of and, in some cases, competitors with, the big players – BlueScope ((BSL)) and Arrium ((ARI)). Participants reported price increases across the local marketplace. Flat steel product prices are improving because of the anti-dumping margins that are now in effect against a lot of imported product. Galvanised steel prices are also reported to be up 20%. Macquarie reports that one manufacturer indicated there was increased import competition as well. The manufacturer was sustaining higher steel prices but dumping margins did not apply to imports of the finished product that competed with its products. It appears not all imports are subject to anti-dumping margins but some offshore mills were taking advantage of higher pricing in Australia.

Indonesian nickel concentrates are a critical feedstock for China's low cost, low energy and low capital intensity Rotary-Kiln-Electric Furnaces (RKEF), as well as Electric-Arc Furnaces (EAF). Together, RKEF and EAF smelters account for around 70% the country's nickel pig iron (NPI) output and require nickel grades of at least 1.5%. Ferronickel capacity accounts for nearly half of China's total nickel capacity.

They're the facts that Commonwealth Bank analysts have at hand as they analyse the nickel market. The analysts are curious about Indonesia's proposed nickel concentrate export ban, scheduled to come into effect from January 1, 2014. It could be delayed as the government seeks to lift export revenues and counter a falling rupiah and current account deficit. If the ban is enacted, it will likely displace around 220,000t of ferronickel capacity in China, and push nickel prices higher. The analysts note China is already trying to circumvent the ban by building 84,000tpa of smelting capacity in Indonesia.

Either way, this issue is looming as a key indicator for nickel prices. At current spot prices the analysts estimate that almost two-fifths of nickel capacity is losing money. A strong rebound in nickel prices next year is expected by the CBA analysts, as supply reductions and stronger demand, reacting to the current weakness, push the market into deficit. Perceived risks of the Indonesian ban should also support prices next year. The analysts highlight the risks of higher costs for the coastal ferronickel sector in China, because of stronger energy demand and prices. Smelters will likely stay on the coast because of a dependence on imported nickel ore. Riskier sulphuric acid pressure leaching projects should also support higher long term prices.
 

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