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Robert New
Weaker demand for steel and steel products in the short term is expected to result in weak demand for steel-making raw materials (iron ore and metallurgical coal). High cost producers of raw materials who responded to high commodity prices during the past two years are expected to shut down production, while lower cost producers are expected to idle some production capacity until there is a demand recovery. Demand for steel, and therefore iron ore and metallurgical coal, is expected to strengthen in response to a global economic recovery, assumed to begin in late 2009 and to continue to gain strength through 2010.
Global production of steel is forecast to decline by 11 per cent in 2009 to 1.2 billion tonnes, before increasing by 6 per cent to 1.3 billion tonnes in 2010. The forecast decline in production in 2009 is a result of sharply weakening demand for steel, associated with the global economic slowdown and the slowing of world industrial production growth. In 2010, the forecast resumption of steel production growth reflects growth in steel consumption in line with the assumed recovery in world economic growth.
As China has accounted for the majority of steel production growth over the past five years, the aggregate production figures mask the increasing polarisation of global steel production. In the first quarter of 2009, world steel production fell by 23 per cent year on year, while over the same period China’s steel production increased by 1 per cent, to account for around 48 per cent of world production. Therefore, the ability of the world steel industry to support demand for steel-making raw materials is highly dependent on China’s steel industry, which in turn is dependent on economic growth in China and China’s key trading partners.
In late May, Rio Tinto settled the Japanese fiscal year 2009 (JFY April 2009 to March 2010) contract prices with Japan’s Nippon Steel Corporation. Contract prices for fines were settled at around 33 per cent lower compared with JFY 2008 prices, and lump prices were settled at around 44 per cent lower. The same terms were subsequently agreed on for contracts with the Republic of Korea’s POSCO, and with Chinese Taipei’s China Steel Corporation and Dragon. Negotiations continue between Rio Tinto and its customers in China.
In mid-March, premium hard coking coal prices for JFY 2009 were settled at $129 a tonne. This represents a 57 per cent decline from JFY 2008 prices, however it is still the second highest contract price on record. Lower quality hard coking coals were settled at prices between $115 and $125 a tonne, while semi-soft prices were settled at around $80 a tonne. The fall in coking coal prices is a direct result of the weak outlook for steel production in 2009.
World crude steel consumption is forecast to decline by 10 per cent to 1.21 billion tonnes in 2009, as steel consumption in all major consuming regions is forecast to fall, with the exception of China.
In the OECD, steel consumption is forecast to decrease by 21 per cent, reflecting the recessions in the United States, the European Union and Japan. However, steel consumption growth is expected to gather pace from late 2009 or early 2010, as various economic stimulus packages take effect. For example, in the United States a significant part of the economic stimulus package is being directed toward steel intensive transport infrastructure, such as bridges and roads.
In 2010, OECD steel consumption is forecast to increase by 4 per cent to 333 million tonnes under the assumption of improved economic conditions.
China’s steel consumption in 2009 is forecast to increase by 3 per cent to 466 million tonnes, the only major steel consumer with a forecast increase in consumption.
The Chinese Government is committed to implementing spending programs, with the aim of mitigating the effects of reduced demand for exports from its major trading partners. The main driver of the increased domestic consumption of steel is the government’s stimulus package, a significant part of which is directed to the construction of steel intensive infrastructure such as railways, bridges and freeways. The effects of the stimulus package are expected to support steel consumption in 2010, underpinning a 9 per cent increase to 508 million tonnes.
Similarly, the Indian Government has maintained its commitment to invest in steel intensive infrastructure. This will aid the country in absorbing the global economic downturn and enhance its ability to respond strongly and quickly to a return to strong economic growth.
In response to falling global steel demand, world steel production in 2009 is forecast to decline by 11 per cent to 1.2 billion tonnes. Since October 2008 there have been significant cuts to steel production, particularly in OECD economies, which is reflected in the forecast for 2009 steel production. For example, steel production is forecast to decline in the United States, the European Union and Japan by 25 per cent, 25 per cent and 20 per cent, respectively. Steel production in China in 2009 is forecast to increase by 4 per cent, supported by the increase in domestic consumption.
In 2010, world steel production is forecast to increase by 6 per cent to 1.3 billion tonnes, underpinned by a moderate increase in economic activity. Reflecting moderate economic growth, the United States, the European Union and Japanese steel production are forecast to increase by 5 per cent, 4 per cent and 3 per cent, respectively. In China, steel production is forecast to increase by 8 per cent as a result of an expected upturn in industrial production and economic growth rates in the second half of 2009.
| World steel outlook | ||||
2007 |
2008 |
2009 |
2010 |
|
|
||||
| Crude steel consumption (Mt) | ||||
| EU 27 | 221 |
215 |
161 |
169 |
| United States | 114 |
103 |
77 |
79 |
| Brazil | 25 |
25 |
22 |
23 |
| Russia | 47 |
48 |
45 |
48 |
| China | 427 |
452 |
466 |
508 |
| Japan | 86 |
82 |
66 |
67 |
| Korea, Rep. of | 56 |
59 |
53 |
56 |
| Chinese Taipei | 22 |
23 |
19 |
21 |
| India | 55 |
60 |
60 |
65 |
| World steel consumption | 1 332 |
1 347 |
1 209 |
1 287 |
|
||||
| Crude steel production (Mt) | ||||
| EU 27 | 210 |
199 |
159 |
165 |
| United States | 98 |
91 |
59 |
62 |
| Brazil | 34 |
34 |
27 |
28 |
| Russia | 72 |
69 |
63 |
65 |
| China | 489 |
502 |
520 |
561 |
| Japan | 120 |
119 |
75 |
77 |
| Korea, Rep. of | 51 |
53 |
45 |
46 |
| Chinese Taipei | 20 |
20 |
17 |
19 |
| India | 53 |
55 |
57 |
62 |
| World steel production | 1 344 |
1 329 |
1 189 |
1 261 |
Lower forecast steel production in 2009 will have a flow-on effect to the production of steel-making raw materials including iron ore and metallurgical coal. Global production of iron ore is expected to decline in 2009 in response to weakening demand. Most of the cutbacks in production volumes are expected to be in countries which have higher cost operations, while lower cost producers are not expected to be as adversely affected by the weaker demand.
Australian exports of iron ore are forecast to increase by 8 per cent in 2009 to 333 million tonnes and by a further 5 per cent in 2010 to 348 million tonnes. China accounted for 78 per cent of Australian exports in the March quarter 2009, providing the basis for continuing growth of Australian production. The increase in exports in 2009 is largely because of the continued ramp up of production at Fortescue Metal Group’s Pilbara operation, which began production in the second quarter of 2008, and a return to capacity production at Cliffs Natural Resources’ Koolyanobbing operation. These expansions are forecast to more than offset lower production resulting from rain interrupted production at Rio Tinto’s Pilbara iron ore operations in February 2009, and from other operations affected by the fall in iron ore demand in late 2008 and early 2009.
Brazilian exports are forecast to decline by 11 per cent in 2009 to 252 million tonnes, reflecting a contraction in Brazil’s 2009 production and significantly lower steel production in Brazil’s traditional export markets in North America and Europe. For example, Vale’s decision to cut production in 2009 by 9 per cent is a key factor in lower export volumes. Brazilian iron ore exports in 2010 are forecast to increase by 9 per cent to 275 million tonnes, reflecting stronger demand from developed economies, and continuing strong demand from China. Prices are assumed to remain above Brazilian operating costs, and it is therefore expected that Brazilian miners will be in a strong position to respond rapidly to an assumed recovery in global demand through a return to capacity at existing mines.
| World iron ore trade outlook | ||||
2007 |
2008 |
2009 |
2010 |
|
|
||||
| Iron ore imports (Mt) | ||||
| EU 27 | 170 |
171 |
128 |
133 |
| Japan | 139 |
140 |
89 |
92 |
| China | 384 |
444 |
527 |
529 |
| Korea, Rep. of | 47 |
49 |
41 |
42 |
| Chinese Taipei | 16 |
16 |
13 |
14 |
| World imports | 829 |
883 |
859 |
885 |
|
||||
| Iron ore exports (Mt) | ||||
| Australia | 267 |
309 |
333 |
348 |
| Brazil | 269 |
282 |
252 |
275 |
| India | 94 |
81 |
65 |
58 |
| Canada | 28 |
27 |
26 |
29 |
| South Africa | 32 |
33 |
34 |
37 |
| Sweden | 18 |
11 |
13 |
14 |
| World exports | 829 |
883 |
859 |
885 |
Chinese and Indian producers of iron ore are generally situated higher on the cost curve than Australian and Brazilian producers. Therefore, the significant fall in spot prices is expected to affect the profitability of some of these miners, particularly those new entrants who responded to the record high prices in the first half of 2008. In addition, it is expected that the Chinese Government will take the opportunity of lower demand growth to further consolidate the mining industry, by either shutting down, or bringing under government management, smaller mines with poor safety records. China’s steel mills are expected to increase their reliance on imported iron ore, as continuing domestic infrastructure congestion and lower import prices increase the competitiveness of imported Australian and Brazilian ore.
World metallurgical coal trade is forecast to decline by 18 per cent to 195 million tonnes in 2009. The decrease in traded metallurgical coal in 2009 is largely a result of lower steel production, stemming from the global economic slowdown.
Imports of metallurgical coal by the European Union in 2009 are forecast to decrease by 13 per cent to 45 million tonnes, while Japan’s imports are forecast to decline by 39 per cent to 33 million tonnes. This reflects a sharp reduction in steel production in these countries, resulting from weaker demand and an increasing reliance on imports of steel products from China.
China’s imports of metallurgical coal increased by 260 per cent in the first four months of 2009 compared with the same period in 2008. This is the result of the combined effect of stable underlying demand for steel and a restocking process. Lower freight rates and lower world coal prices have increased the competitiveness of imported coal compared with domestically-produced coal. In addition, significant coking coal production capacity in Shanxi has been shut down for safety reasons. While demand for coal resulting from stable demand for steel is expected to be maintained throughout 2009, imports are forecast to decrease once the restocking process is complete. The uncertain timeframe for the completion of restocking is a risk to the forecast.
| World metallurgical coal trade outlook | ||||
| 2007 | 2008 | 2009 | 2010 | |
|
||||
| Metallurgical coal imports (Mt) | ||||
| EU 27 | 55 | 52 | 45 | 53 |
| Japan | 54 | 54 | 33 | 33 |
| China | 6 | 7 | 14 | 14 |
| Korea, Rep. of | 23 | 24 | 20 | 20 |
| Chinese Taipei | 8 | 6 | 6 | 6 |
| India | 23 | 24 | 30 | 31 |
| Brazil | 10 | 12 | 9 | 10 |
| World imports | 227 | 237 | 195 | 206 |
|
||||
| Metallurgical coal exports (Mt) | ||||
| Australia | 138 | 135 | 115 | 120 |
| Canada | 27 | 29 | 21 | 22 |
| United States | 29 | 38 | 29 | 29 |
| Russia | 15 | 20 | 19 | 21 |
| World exports | 227 | 237 | 195 | 206 |
Australian metallurgical coal exports, which accounted for 57 per cent of world trade in 2008, are expected to decline by 15 per cent to 115 million tonnes in 2009, as a result of expected lower global crude steel production.
In 2009, metallurgical coal exports from Canada and the United States are forecast to fall by 28 per cent and 24 per cent, respectively. The larger fall in exports from North American suppliers reflects the higher cost of production in North American mines compared with Australian mines.
In 2010, in response to improving economic conditions and increasing demand, Australian exports are forecast to increase by 4 per cent to 120 million tonnes. Exports from Canada are forecast to increase by 5 per cent to 22 million tonnes, and US exports are forecast to remain largely unchanged at 29 million tonnes.
Volatility in the prices of steel-making raw materials over the past two years has driven significant changes in Australian export earnings from these commodities. While export volumes have been negatively affected by weaker demand, changes in export earnings for 2008-09 and 2009-10 primarily reflect changes in prices. Supporting increases in earnings for both iron ore and metallurgical coal in 2008-09 is a 17 per cent depreciation of the Australian dollar against the US dollar, while an assumed 3 per cent appreciation of the Australian dollar in 2009-10 is expected to reinforce declines in export earnings for these commodities.
Earnings from iron ore are estimated to increase by 64 per cent in 2008-09, reflecting record high contract prices for JFY 2008, a 7 per cent increase in export volumes and a depreciation of 17 per cent in the Australian exchange rate against the US dollar. A significant reduction in prices for JFY 2009, in addition to the assumed Australian dollar appreciation, is forecast to result in a 24 per cent reduction in Australian export earnings from iron ore in 2009-10 to a value of $25 billion. The effect of the price reduction is forecast to more than offset a 7 per cent increase in export volumes.
In JFY 2008, metallurgical coal contract prices increased by 200 per cent, which resulted in an estimated 115 per cent increase in export earnings in 2008-09 to $34 billion. The effect of the price increase more than outweighed a 13 per cent reduction in export volumes, driven largely by weaker demand in the last quarter of 2008 and the first quarter of 2009. However, in 2009-10, export earnings are forecast to decrease by 46 per cent to $19 billion. This reduction in export earnings from metallurgical coal is mainly driven by a 57 per cent decline in contract prices for JFY 2009.
| Steel and iron ore outlook | ||||||||
2007-08 |
2008-09 |
s |
2009-10 |
f |
% change |
|||
|
||||||||
| Production | ||||||||
| Iron and steel s | Mt |
8.12 |
6.21 |
7.59 |
22.2 |
|||
| Iron ore | Mt |
324.7 |
339.4 |
363.8 |
7.2 |
|||
| Metallurgical coal | Mt |
140.1 |
124.8 |
133.7 |
7.1 |
|||
|
||||||||
| Exports | ||||||||
| Iron and steel | Mt |
2.13 |
1.61 |
1.89 |
17.4 |
|||
| – value | A$m |
1 562 |
1 371 |
1 183 |
– 13.7 |
|||
| Iron ore | Mt |
294.3 |
315.0 |
338.4 |
7.4 |
|||
| – value | A$m |
20 511 |
33 670 |
25 468 |
– 24.4 |
|||
| Metallurgical coal | Mt |
137 |
119 |
128 |
7.6 |
|||
| – value | A$m |
16 038 |
34 464 |
18 628 |
– 45.9 |
|||