ANALYSIS - Raw material bottlenecks to buoy steel prices – 20 Dec 09
Cost pressures will be the major driver of global steel prices next year, with bottlenecks in the steel supply chain as well as in key raw materials such as iron ore and coking coal likely to keep prices buoyant.
Worldwide steel production is creeping up from lows as the global economy slowly comes back to life, but the revival of raw material supplies may not respond quickly enough, particularly in the face of an insatiable China.
The world's top steel producer is now braced to manufacture more than 40 percent of the world's total steel output this year, exceeding 500 million tonnes, which will only move higher next year, inflating its demand for iron ore.
"Chinese demand for raw materials is pushing prices higher and we think next year steel prices will have to move up as producers pass on the rising raw material costs," said analyst Gavin Wood at Nomura International.
Since the beginning of December several banks have raised their price forecasts for benchmark iron ore prices next year, citing surprisingly massive demand from what they see as the world's biggest commodity consumer.
China's steel output has reached 472 million tonnes in the first ten months of this year, as global output rose to 982 million in the same period, World Steel Association figures show. Analysts expect China's year-end output to rise above 550 million tonnes.
Steel makers around the world are restarting blast furnaces shuttered as demand dived during the global economic slowdown.
"This movement by steel makers is boosting ex-China demand for iron ore and causing the iron ore market to become tighter earlier than we expected," analysts at JP Morgan said in a research note.
"The Big 3 is close to capacity," it continued, referring to the three mining giants --- BHP Billiton, Rio Tinto and Brazil's Vale -- who have the power to set prices in the $80 billion a year business.
"Rio Tinto and BHP have been working at or close to capacity for a while now. Vale was the one who really took the hit in volumes during the crisis. But with the strength of Chinese demand, coupled with a recovering Europe, the main suppliers globally should be again close to reaching their full capacity pretty soon," it said.This picture was well reflected in the prices.
Asian iron ore prices this week rose by more than 4 percent from a week ago. Despite they have fallen from the three-month highs struck in November, they are still some 30 percent above the contract prices of 2009.
For a graphic on iron ore prices, click: http://graphics.thomsonreuters.com/129/CMD_IRNP1209.gif
BRUTAL RECOVERY
The supply and demand picture points to higher prices in other steelmaking raw materials such as scrap and coking coal.
The world scrap market is looking at 16 percent reduced output to 399 million tonnes this year, as the global economic downturn hammered recycling activity and for next year, the bets are not on for a swift recovery.
Goldman Sachs said tightness and demand were to drive prices higher.
"Sourcing scrap domestically is challenging as both consumer and industrial activity have slowed due to the weakened economy and will become more difficult with winter...," the bank said in a recent research note.
The picture is similar for the price of coking coal, which analysts believe could rise 25 percent next year if China continues to import at the current rate as supply will remain capped by logistical bottlenecks.On top of the price hikes, next year will stage sudden price increases, analysts say, due to increased spot buying from the middlemen, who come back to the market to replenish their stocks, but face a shortage as blast furnaces can only ramp up at a certain pace.
"Apparent demand recovery drives steel pricing sentiment and as a consequence steel prices," said Credit Suisse analyst Michael Shillaker. "The destock was bigger than any we have seen before, and the restock could be equally as brutal on the upside."