Dear Hans,
We are sorry you couldn’t make it to the Kallanish Scrap & Iron Ore Markets Webinar last Wednesday.
For your convenience, we have made a recording available here so you can watch it at any time. Here are 12 questions from the webinar which the Kallanish editorial team have answered for you.
Q: The Chinese Iron ore import prices have shot up for Australian fines after the Brazilian supply crunch. When do you see the Brazilian supply easing, and do you think that the ease in supply is equally able to bring prices south of $100/DMT again in near term as it was able to drive them up recently?
A: As things stand Brazilian supply is already recovering. Unless there are new announcements, Brazilian supply should be running at higher levels in the coming weeks, rather than months. The uncertainty lies around whether there will be unexpected further disruptions due to the covid-19 outbreak. Without another dramatic change in dynamics, higher supply should be enough to bring prices under $100/t again.
You can read the remaining 11 questions and answers click here.
We received many more questions during the webinar that we had time to answer. The Kallanish Editorial team have read all the questions and provided answers.
Q: The Chinese Iron ore import prices have shot up for Australian fines after the Brazilian supply crunch. When do you see the Brazilian supply easing, and do you think that the ease in supply is equally able to bring prices south of $100/DMT again in near term as it was able to drive them up recently?
A: As things stand Brazilian supply is already recovering. Unless there are new announcements, Brazilian supply should be running at higher levels in the coming weeks, rather than months. The uncertainty lies around whether there will be unexpected further disruptions due to the covid-19 outbreak. Without another dramatic change in dynamics, higher supply should be enough to bring prices under $100/t again.
Q: Is China still prohibiting ferrous scrap imports and is it a total ban? If so, this is presumably increasing the costs for their steelmakers because (rising) domestic arisings are still not enough. 2 questions: a) Why are the authorities doing this? b) Are Chinese mills being forced to import billet and/or ore instead of scrap part of the reason why ore prices recently firmed, against consensus predictions?
A: The ban on most waste exports, including ferrous scrap, is still in place. Imports can be licenced, but licence issuance has fallen dramatically to a few thousand tonnes/year. Yes, this is increasing costs because local supply is not sufficient. As we noted in the China Scrap Market Report 2019, after a brief surplus in 2017 the domestic scrap market is likely to remain in deficit until around 2025, and so banning imports increases costs, especially for EAFs. This is key to the demand for billet and iron ore and hence has driven prices higher.
Q: What would be the scenarios should the Chinese open the scrap imports?
A: If China fully allows scrap imports and demand remains as it is, Chinese steelmakers could aim to further boost production by maximising scrap use. That could mean a decline in demand for the import of steel products and a sudden increase in demand for seaborne scrap. In 2009 China imported 13.7 million tonnes of scrap so the potential to disrupt scrap markets is large. We would expect to see ex-China EAF steelmaking margins vanish, driving overseas steel markets back into relative parity with China markets and hence shutting down the opportunity for steel imports to China.
Q: Why is the domestic iron ore supply not picking up? Does this relate to what MySteel is suggesting that the increase in domestic production of pellets is locking up supply?
A: The main reason domestic supply has not picked up is that the sector has been reformed dramatically over recent years. Previously there were a very large number of mines at marginal costs which would start or stop production depending on cost. These have largely been shut down for safety and environmental reasons. An increase in domestic production of pellets can only account for a limited volume of ore tied up. It may have impact at the margins but the big picture remains that there is not enough operable capacity to increase supply dramatically.
Q: What probability do you put on China loosening scrap import restrictions, and when might this occur?
A: Chinese policy making is a black box so it is difficult to say. What we can say is that this was initially a niche issue. CAMU does not carry a huge amount of weight in the halls of power. Now however more powerful players are lobbying alongside them. That includes CISA and the major state-owned steelmakers. As that lobbying gains momentum, easing restrictions becomes more likely. I would not be surprised if import restrictions are eased in 2021.
Q: China and Australia had tensions about Covid19 and iron ore shipments affected. What is the feeling from China government, when do you think such conflict be over?
A: China and Australia will always have some competing interests and some shared interests and the relationship will always be a bumpy one. For iron ore however there is an underlying shared interest. China cannot source enough iron ore without Australia and Australia relies on commodity exports for its national budget. The relationship is not as tense as during the Rio Tinto/Chinalco bust up and even then, markets essentially were set not by politics but supply and demand. Chinese has a very appropriate word for this: ?? (mafan). The political tension is troublesome, and annoying for those involved, but its impact on prices is small.