 "Iron ore to fall on weak fundamentals")
Whatever delight the 2015-16 gross domestic product (GDP) growth might offer, India's steelmakers are destined to remain in the woods till the global steel industry gets rid of surplus capacity estimated at about 600 million tonnes (mt), of which half rests in China. In a situation of steel margins remaining under pressure, one good development for steelmakers here without iron ore mines linkages is the decision by the National Mineral Development Corporation (NMDC) to cut prices of both lump ore and fines for two months in a row. But why did NMDC, the country's largest merchant miner and price setter for the steelmaking ingredient, go for price cuts when production of the metal here rose 2.3 per cent to 31 mt in the first four months of 2016? The only answer is that iron ore is a highly globalised commodity and the size of its seaborne trade is next only to crude oil. Last year, 1.3 bt of ore (out of two billion tonnes (bt) of world production) were moved by sea.
Even though migration from investment-led growth to one driven by consumer demand was the reason for a fall in China's steel production in 2015 by 19 mt to 804 mt, its iron ore imports originating mostly in Australia and Brazil was up 2.2 per cent to 953 mt. As ore price bottomed at $38.3 a tonne on December 11, mines closure speeded up in China leading to its steelmakers' growing dependence on seaborne supplies. The average ore price for 2015 was around $50 a tonne, a major climb down from $192 a tonne on February 16, 2011.
The bottom line is that Indian producers will not lose sight of movement in world prices of ore while fixing local rates. Further downward revisions of prices by local producers are not ruled out as the year progresses in line with forecasts that in the final quarter of 2016 iron ore could trade below $40 a tonne. For the rest of 2016 and next year, too, everything appears to be stacked against the mineral.
For evidence, Caixin manufacturing purchasing managers' index for May was 49.2 against 49.4 in April. In fact, May marked the 15th consecutive month when the index clicked below the neutral 50-point level. This is a pointer to the steady decline in China's manufacturing health. New orders, including export orders received by the manufacturing sector, were once again down in May.
Advances in ore prices earlier this year were also partly due to supply disruptions in Australia and Brazil. Prices could not but fall from the artificially elevated April level as fundamentals are pitted against ore this year and the next. Chinese binge buying of ore petered out as port stocks rose to around 100 mt. The country now has the twin problems of oversupply of steel and metal producers denied profit margins at current prices. The result will be slowdown of steel production.
This is to happen at a time when the world's leading miners are engaged in bringing new iron ore production capacity on stream, thanks to billions of dollars they have invested anticipating China's steel production to climb to 1 bt. Much to their dismay, the World Steel Association has forecast a fall in Chinese steel demand from 672 mt in 2015 to 645 mt this year and then to 626 mt in 2017.
As demand for ore has fallen way short of their expectations, miners will have to contend with overcapacity for quite some time. No wonder, then, that a Vale official told Reuters: "We're going to see a long and painful period of adjustment in the industry."
Even though migration from investment-led growth to one driven by consumer demand was the reason for a fall in China's steel production in 2015 by 19 mt to 804 mt, its iron ore imports originating mostly in Australia and Brazil was up 2.2 per cent to 953 mt. As ore price bottomed at $38.3 a tonne on December 11, mines closure speeded up in China leading to its steelmakers' growing dependence on seaborne supplies. The average ore price for 2015 was around $50 a tonne, a major climb down from $192 a tonne on February 16, 2011.
The bottom line is that Indian producers will not lose sight of movement in world prices of ore while fixing local rates. Further downward revisions of prices by local producers are not ruled out as the year progresses in line with forecasts that in the final quarter of 2016 iron ore could trade below $40 a tonne. For the rest of 2016 and next year, too, everything appears to be stacked against the mineral.
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Let's first consider the emerging demand scene. Last year saw Chinese steel production decline for the first time in three decades. Between January and April this year, Chinese steel production skidded 2.3 per cent to 262 mt. Production might fall once again for the whole of 2016 if Beijing delivers on its promise to take out uneconomic and environment unfriendly capacity from production stream. But when it comes to China, it's action on the ground - rather than promises - that matters. Hasn't the country reheated blast furnaces of an aggregate capacity of around 50 mt when iron ore prices peaked at $70 a tonne close to April-end? Ore prices resurgence at that point happened principally due to Chinese steel production briefly rebounding on the economy benefiting from an upswing in credit flow. Economic stimulus programme of the country has, however, started running out of steam.
For evidence, Caixin manufacturing purchasing managers' index for May was 49.2 against 49.4 in April. In fact, May marked the 15th consecutive month when the index clicked below the neutral 50-point level. This is a pointer to the steady decline in China's manufacturing health. New orders, including export orders received by the manufacturing sector, were once again down in May.
Advances in ore prices earlier this year were also partly due to supply disruptions in Australia and Brazil. Prices could not but fall from the artificially elevated April level as fundamentals are pitted against ore this year and the next. Chinese binge buying of ore petered out as port stocks rose to around 100 mt. The country now has the twin problems of oversupply of steel and metal producers denied profit margins at current prices. The result will be slowdown of steel production.
This is to happen at a time when the world's leading miners are engaged in bringing new iron ore production capacity on stream, thanks to billions of dollars they have invested anticipating China's steel production to climb to 1 bt. Much to their dismay, the World Steel Association has forecast a fall in Chinese steel demand from 672 mt in 2015 to 645 mt this year and then to 626 mt in 2017.
As demand for ore has fallen way short of their expectations, miners will have to contend with overcapacity for quite some time. No wonder, then, that a Vale official told Reuters: "We're going to see a long and painful period of adjustment in the industry."