Commodities | Aug 02 2016
-Emerging upside risk to Chinese steel production
-China's steel exports still rising despite trade litigation
-Steel demand remains robust in China
-Grid, property copper demand losing momentum in China
-Higher pigment prices to support mineral sands upside
By Eva Brocklehurst
Steel
China continues to expand its steel exports, crowding out other sources worldwide, Morgan Stanley observes. The winners in this game will be those delivering the raw materials to China’s steel trade, the broker adds.
China’s steel exports expanded by 9% in the first half, appearing little affected by a rise in trade litigation. While China’s steel exports to Europe and the Americas has fallen in 2016 – where most of the trade litigation is sourced – this is being made up for by alternative markets in Asia. China has lifted exports to Asia by 20% in the first half, the broker notes.
The emerging upside risk to Chinese steel production rates in 2016 potentially alters the broker’s seaborne iron ore and metallurgical coal forecasts. China’s first half crude steel output, annualised at 802mt, requires 45-48mt more imported ore to be considered, while metallurgical coal imports are annualising at 35% above Morgan Stanley’s March 2016 outlook.
Iron Ore
Ord Minnett observes Chinese steel production is continuing at high rates while iron ore shipments for the major producers were slightly below expectations in the June quarter. Iron ore prices remain above forecasts with spot prices above US$55/t since the beginning of July.
Steel demand data remains supportive with property prices improving, building starts rising and infrastructure spending still strong.
Looking ahead, Chinese steel production is expected to fall slightly towards year end and this could mean iron ore prices soften from current levels. Ord Minnett expects iron ore prices to be US$53/t in the second half of 2016 and US$48/t in 2017.
Copper
A number of disruptions at several large copper mines suggest production misses to Macquarie, largely from lower grades and technical difficulties but also snow at Los Bronces and a mill failure at Grasberg. Grasberg is projecting a move to higher grade ore and a big uptick in production in the second half.
Despite the shift upwards in disruptions, Macquarie is still expecting a year where disruptions are relatively low.
Not all mines performed badly in the June quarter. The broker notes MMG’s new greenfield mine at Las Bambas outperformed and achieved commercial production on July 1. Peru, where Las Bambas is situated, has almost doubled copper output in less than two years and become the number 2 copper producer after Chile.
UBS has reviewed the downstream demand for copper amid concerns strong credit in the first half has led to a lift in the copper finance trade. Apparent consumption in China is up 11% in the year to date. Grid spending remains robust but power station investment and most physical indicators are actually negative, the broker observes. Vehicle sales and rail spending are positive but provide a less important component to copper demand.
Based on the data, UBS suggests real copper demand growth is around 5-10%. The two heaviest components of copper demand, the grid and property sectors, appear to be losing momentum while appliances are improving and may benefit from fit-out demand as a result of the strong property sales in the first half.
UBS forecasts 4.3% growth in China’s copper demand in 2016. Copper demand is typically weighted to the second half so momentum going forward will be the key. UBS forecasts a copper price of US$2.00/lb at the end of 2016, 10% lower than spot.
Mineral Sands
Titanium dioxide pigment prices are rising. Credit Suisse is unsure why but notes it is variably attributed to heavy de-stocking by pigment producers, capacity reductions and a lot of painting being done. While these factors may be significant, the broker also suggests cost-push on rising ilmenite prices is another driver in China, where there have been eight successive price rises through July.
Higher pigment prices should translate to some upside for mineral sands feedstock pricing, albeit with a delay as demand volumes are likely to rise first given the latent capacity in feedstock. Credit Suisse forecasts high grade feedstock prices to rise 13-16% in 2017.
The broker downgrades rutile prices by 1% for 2016 and upgrades by 3% for 2017, expecting ilmenite has the strongest growth outlook because of the prior closures of mines in China, where ilmenite is a by-product of iron ore. Channel checks suggest 500,000t of ilmenite supply was lost from Sichuan in 2015, tightening the Chinese market.
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