Asian steel capacity growth likely to underperform forecasts: S&P’s Paul Bartholomew
Manufacturing has replaced property as the key driver for steel markets in China
Banks bearish on iron ore, with supply growth coming later this decade
S&P Global analysts are sceptical that demand for iron ore will rise as fast as projected outside the key China market, pouring cold water on suggestions South-East Asia and India will be able to replace falling steel production out of the Middle Kingdom.
S&P Global Commodity Insights’ Paul Bartholomew said on a webinar yesterday talking about the iron ore, coking coal and steel outlook, that iron ore prices are being projected by the major analysis and price-setting firm to remain around US$110/t this year before falling to US$106/t next year.
China’s economy and, in particular, its hobbling property market have been a major concern this year, weighing on sentiment and cutting prices for Pilbara grade iron ore from US$142/t in late December to US$108/t yesterday.
As it shifts away from construction to services and decarbonises, there are concerns China has already hit peak steel production when it produced 1.065Bt in 2020.
But Bartholomew suggested it would be realistic to expect only a quarter of the 100Mtpa of additional steel production capacity forecast by the end of this decade in India and Southeast Asia, most of it in the form of conventional blast furnaces, to come to life.
And in India, the next big growth market for steel but one largely serviced by its own domestic iron ore supplies, ambitious targets to produce 300Mtpa could fall one third short.
“The reason I’m a bit bearish or a bit skeptical about some of these projected numbers is really because it’s always difficult building greenfield projects anywhere,” Bartholomew said.
“I think a lot of these projects were put on the drawing board, or at least announced, at a time of higher profits, perhaps before the pandemic sort of kicked in.
“They’re nearly all largely, or in part, funded by China. Does China still have the appetite to build all that offshore capacity? Do the host countries still want China to build that capacity?
“So I think there’s lots of question marks and also some of the established producers have been very, very slow in actually building the next phases of their projects. So even though the numbers look impressive, I think the reality will be quite different.”
Manufacturing now the big driver
While property has historically driven the Chinese steel market, Bartholomew said manufacturing is now the key driver domestically, leading responses in a key quarterly iron ore and steel survey.
Around 60% of respondents pointed to manufacturing as the key driver, a big turnaround from the traditional dominance of property and infrastructure.
And he said the Chinese steel market had not seen price drops of the magnitude of the Euro and North American markets, where demand has been very weak for two years.
But a rise in Chinese steel exports does raise concerns of overproduction, with steel output flat despite falling property construction rates.
“What has been happening a lot this year, and I guess is quite a worrisome development, is China’s really kind of relying a lot on finished steel exports to kind of offset that domestic overproduction,” he said.
“We anticipate that China could actually export about 100Mt, or somewhere between 95-100Mt of finished steel this year.
“Which kind of gets us back to the sort of bad old days, as it were, of 2013-2015, when we had the real nadir in the global steel industry, a lot of it to do with very strong exports.”
Chinese iron ore exports have been rising, with port stocks up 17% YoY on July 4 to 149.9Mt according to MySteel and 94 vessels queueing to drop off cargo, adding to pessimism around the future direction of prices.
But supply in the years ahead is largely incremental.
That is apart from Mineral Resources’ (ASX:MIN) 35Mtpa Onslow Iron mine and the 55Mt S&P forecasts coming from the partly Rio Tinto (ASX:RIO) owned Simandou in Guinea from 2028.
“We see the big recovery in port stocks there from very strong iron ore imports, really, this year,” Bartholomew said.
“There hasn’t been any decrease at all in that situation from China, even though steel production’s fairly kind of flat.
“We’ve got US$110/t for this year, probably a little bit lower next year, around about US$106/t average. But there’s certainly good demand for some of the lower grade, medium grade iron ore to help offset some of those very, very slim steel margins.”
S&P’s Crystal Wong added that steelmakers best off were those like world’s top producer Baowu, which could produce higher value products for stronger markets like auto and renewables manufacturing, with the broader sector facing weak and often negative margins over the past two years and few overall cuts to production capacity.
Banks cook the golden goose
While S&P remains constructive on iron ore prices, at least in the sense they may not budge much either way, Australia’s banks are more bearish.
“We see little reason to change our long-held view that rising supplies and softening demand will see iron ore prices move lower through the second half of this year,” Westpac IQ senior economist Justin Smirk said.
“However, early June data suggests an incremental improvement in China’s residential property sales following recent moves in Tier 1 cities to ease home-buying rules.
“This has provided a floor under iron ore prices at around US$101/t to US$102/t. Nevertheless, the market remains well supplied with a strong surplus position, so any move higher in price should be short lived and limited to the US$110/t to US$112/t range.”
Westpac thinks prices will drop to US$102/t this quarter and US$90/t next before sliding to US$85/t in March next year before lifting marginally to US$87/t by year end 2025.
That’s unchanged from last month’s projections.
NAB sees US$100/t in the September quarter, falling to US$95/t in December, US$92/t in March and eventually US$84/t by December 2025, an average of US$108 across 2024 and US$87/t over 2025.
Commbank’s Vivek Dhar meanwhile said falling Australian iron ore exports could put a floor under prices, with more marginal tonnages meaning the cost curve is sitting higher than normal.
Aussie iron ore shipments, around 65% of seaborne exports, fell 5.3% in the first half of 2024, leading the overall market to a 4.6% YoY decline despite a 5.7% lift in Brazilian and 6% rise in Vale exports specifically.
While seaborne supply has been struggling this year, Dhar thinks supply growth will get stronger as the decade progresses.
“The trajectory of seaborne supply is expected to play a more important role in driving iron ore prices in coming years. The most immediate increase in supply may come from Brazil, with Vale hoping to unlock an additional 50Mtpa (~3% of seaborne supply) by the end of 2026,” he said.
“Australian miners BHP and Rio Tinto have flagged the potential to boost supply by ~45‑90Mtpa (3‑6% of seaborne supply) over the medium term. But perhaps the most significant increase in seaborne supply will be the much‑anticipated Simandou iron ore project in Guinea.
“The project is set to begin production next year and is expected to reach capacity of at least ~120Mtpa (7‑8% of seaborne supply) by the early 2030s.
“The onset of new low‑cost supply from Brazil, Australia and Guinea underpins our view of lower iron ore prices by the end of the decade, especially with China’s steel output showing signs of plateauing at current levels.”
There was precious little market news in iron ore, with most producers preparing for quarterly reporting season.
At the junior end of the spectrum, Magnetite Mines (ASX:MGT) signed a non-binding head of agreement with Japanese steelmaker JFE Shoji Corporation for an offtake deal that could support sale of up to 10% of magnetite concentrate to be produced at its future Razorback mine in South Australia over an initial 15-year period.
The announcement foreshadows a DFS and could be the prelude to a JV down the line, likely required to support construction costs for the mine.
The parties will aim to execute a definitive agreement by January 31 next year. $35m capped Magnetite was among the exploration firms that popped during iron ore’s record price run in 2021 but has suffered big hits since as construction inflation, low high-grade premiums and weakening commodity prices have hurt enthusiasm for magnetite.
ASX iron ore stocks
Scroll or swipe to reveal table. Click headings to sort.
CODE COMPANY PRICE WEEK RETURN % MONTH RETURN % 6 MONTH RETURN % YEAR RETURN % MARKET CAP ACS Accent Resources NL 0.007 0% 0% -13% -36% $ 3,311,890.98 ADY Admiralty Resources. 0.012 9% 50% 100% 100% $ 19,553,687.28 AKO Akora Resources 0.14 -7% -7% -6% -14% $ 16,868,232.64 BCK Brockman Mining Ltd 0.019 0% -17% -27% -47% $ 176,324,410.49 BHP BHP Group Limited 43.74 1% -2% -10% 1% $ 220,510,159,923.16 CIA Champion Iron Ltd 6.44 -1% -2% -21% 14% $ 3,352,113,476.47 CZR CZR Resources Ltd 0.28 -2% 2% 33% 75% $ 66,005,700.88 DRE Dreadnought Resources Ltd 0.022 5% 10% -19% -60% $ 80,800,678.08 EFE Eastern Resources 0.005 0% -29% -44% -55% $ 6,209,732.31 CUF Cufe Ltd 0.014 8% 8% -26% -18% $ 18,691,573.11 FEX Fenix Resources Ltd 0.375 15% 9% 36% 36% $ 260,481,720.00 FMG Fortescue Ltd 21.86 0% -10% -21% 1% $ 67,183,014,510.76 RHK Red Hawk Mining Ltd 0.82 8% -5% 21% 75% $ 159,849,183.20 GEN Genmin 0.11 -15% -27% -31% -31% $ 78,801,385.14 GRR Grange Resources. 0.37 -3% 1% -20% -28% $ 428,215,318.26 GWR GWR Group Ltd 0.085 -1% -10% -8% 13% $ 25,054,899.09 HAV Havilah Resources 0.215 10% 16% 16% -10% $ 64,911,038.05 HAW Hawthorn Resources 0.06 0% -14% -43% -59% $ 20,100,936.78 HIO Hawsons Iron Ltd 0.027 0% -7% -41% -37% $ 27,240,991.47 IRD Iron Road Ltd 0.08 0% -2% 21% -12% $ 66,569,966.72 JNO Juno 0.03 -14% -38% -73% -60% $ 5,458,357.80 LCY Legacy Iron Ore 0.014 0% -7% -18% -30% $ 100,276,127.41 MAG Magmatic Resrce Ltd 0.066 16% -8% 65% -20% $ 27,108,296.41 MDX Mindax Limited 0.04 -9% -31% -27% -33% $ 81,951,351.20 MGT Magnetite Mines 0.295 -3% -20% -1% -30% $ 30,022,579.84 MGU Magnum Mining & Exp 0.013 -7% -13% -61% -54% $ 10,521,698.24 MGX Mount Gibson Iron 0.44 5% 5% -17% 6% $ 529,984,656.86 MIN Mineral Resources. 56.32 3% -18% -16% -17% $ 11,069,892,963.32 MIO Macarthur Minerals 0.068 0% 11% -51% -65% $ 11,700,201.58 PFE Panteraminerals 0.0375 25% -25% -25% -57% $ 14,023,988.31 PLG Pearlgullironlimited 0.016 7% -27% -47% -47% $ 3,681,752.22 RHI Red Hill Minerals 6.1 14% 15% 49% 67% $ 402,868,078.30 RIO Rio Tinto Limited 120.6 0% -4% -8% 8% $ 44,508,824,058.60 RLC Reedy Lagoon Corp. 0.003 -25% -25% -40% -56% $ 1,858,622.20 CTN Catalina Resources 0.004 33% 14% 0% 33% $ 3,096,217.23 SRK Strike Resources 0.035 -5% -13% -30% -50% $ 9,931,250.00 SRN Surefire Rescs NL 0.008 0% 0% -11% -43% $ 15,890,462.50 TI1 Tombador Iron 0.014 0% 0% 0% -30% $ 30,218,753.22 TLM Talisman Mining 0.26 -2% -5% -10% 58% $ 47,080,087.25 VMS Venture Minerals 0.019 -5% -24% 171% 36% $ 46,344,451.48 EQN Equinoxresources 0.285 -11% -26% -17% 138% $ 38,285,000.93 AMD Arrow Minerals 0.002 0% -33% -71% -50% $ 26,348,412.74 CTM Centaurus Metals Ltd 0.46 2% 6% -8% -49% $ 210,876,784.75
Coal stuff
While plenty of iron ore is expected to come online in the months ahead, the supply picture is much more uncertain for coking coal.
S&P’s Bartholomew expects it will remain in demand, with much of the new steel capacity added in India and South East Asia, neither of which boast quality domestic sources of steelmaking coal, using conventional BF/BOF technology.
“In terms of coking coal, for all the reasons that we know there’s been very little investment in any type of coal (including) coking coal.
“In Queensland … there is a big new project coming on, Pembroke Resources, but they’re kind of describing that as the last big open pit, high quality coking coal projects probably in Queensland.
“Otherwise, you know, production or exports have really kind of dropped off.”
Coking coal prices have stabilised somewhat after surging on last week’s news of a fire at Anglo American’s Grosvenor mine.
READ: Bulk Buys: Anglo walking on hot coals as fire hits sale process
Front month Singapore futures are trading at US$251/t. Coal producers like Whitehaven Coal (ASX:WHC), Coronado Global Resources (ASX:CRN) and Yancoal Australia (ASX:YAL) have all been winners over the past week, though the latter is primarily a thermal coal miner.
Thermal coal markets remain well stocked with front month Newcastle futures at US$136/t.
ASX coal stocks
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CODE COMPANY PRICE WEEK RETURN % MONTH RETURN % 6 MONTH RETURN % YEAR RETURN % MARKET CAP NAE New Age Exploration 0.004 33% 0% -20% -20% $ 8,072,545.10 CKA Cokal Ltd 0.09 -4% -8% -31% -10% $ 100,342,255.14 BCB Bowen Coal Limited 0.051 -14% -22% -41% -65% $ 145,248,280.40 SVG Savannah Goldfields 0.019 0% -34% -57% -81% $ 5,340,613.40 GRX Greenx Metals Ltd 0.8775 0% -4% -5% -5% $ 242,643,897.84 AKM Aspire Mining Ltd 0.35 0% 52% 119% 373% $ 182,749,314.60 AVM Advance Metals Ltd 0.026 -10% 4% -22% -80% $ 3,520,723.52 YAL Yancoal Aust Ltd 7.46 8% 19% 40% 60% $ 9,797,660,622.54 NHC New Hope Corporation 5.05 -1% 1% -4% 6% $ 4,260,490,738.56 TIG Tigers Realm Coal 0.003 0% 0% -50% -40% $ 39,200,107.10 SMR Stanmore Resources 3.95 6% 11% -1% 61% $ 3,488,385,623.58 WHC Whitehaven Coal 8.97 10% 12% 12% 36% $ 7,521,041,048.16 BRL Bathurst Res Ltd. 0.805 -1% -2% -17% -21% $ 154,044,622.90 CRN Coronado Global Res 1.41 9% 12% -19% -7% $ 2,355,417,490.65 JAL Jameson Resources 0.05 35% 61% 61% -15% $ 22,007,885.49 TER Terracom Ltd 0.225 -2% 2% -46% -52% $ 176,212,571.70 ATU Atrum Coal Ltd 0.004526 0% 0% 0% 0% $ 11,966,853.96 MCM Mc Mining Ltd 0.135 0% -13% -10% -19% $ 55,891,802.12 DBI Dalrymple Bay 3.04 2% 5% 12% 16% $ 1,507,115,467.68 AQC Auspaccoal Ltd 0.092 12% 24% -8% -32% $ 52,312,490.55
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