Commodity Blog

Commodity Prices – Steel

A Japanese steel producer said Monday that metallurgical coal buyers have accepted that sagging global steel demand doesn’t warrant the cancellation of all unwanted contract tonnage in the current fiscal year, but they are still holding out for suppliers to cancel some high-priced fiscal 2008 term deliveries. The source also said 2009 contract prices may have to be settled higher than in 2007 to allow for long-term sustainability in met coal supplies.
Representatives of market leader, BHP Billiton-Mitsubishi Alliance, kicked off FY 2009 talks with their North Asian customers in late-January, and have told buyers that “a contract is a contract,” the Japanese source said. BMA is expected to resume talks in Japan later this month, the source added.
Previously, market sources said Asian steel mills are finding it difficult to take delivery of their outstanding contracted FY 2008 coal tonnages and buyers were hoping that the current situation could be considered a force majeure condition.
EARLY 2008 PROJECTIONS MISSED THE MARK
FY 2008 tonnages for annual contracts starting April 1 were procured at record-high prices in early 2008. Prime hard coking coals from Australia and Canada were priced at about $300/mt FOB, largely as a result of flooding in the main Australian metallurgical coal-producing state of Queensland in early 2008, and partly due to harsh winter conditions in Canada.
In early calendar 2008, the metallurgical coal supply situation was extremely tight, forcing steelmakers to cough up high annual prices for their FY 2008 coal supplies. Mills also entered into contracts for additional tonnages on top of projected requirements for FY 2008 in anticipation of events that could further constrict supply–such as mine accidents, weather disturbances and equipment failure.
Projections made in early 2008 were too optimistic and were overshadowed by the global financial meltdown, which started in mid-September and sent commodities pricing and freight rates on a downward spiral. For the mills, the financial crisis meant they had to cut down on their steel production. This put them in a quandary regarding how to deal with outstanding, high-priced, contracted 2008 tonnages that they no longer required.
BMA LIKELY TO FIND PROPOSAL HARD TO SWALLOW
In late January 2009, BMA informed its customers that FY 2008 contracts must be honored, the Japanese source said. However, buyers are still negotiating with their suppliers to reduce the delivery of a portion of their outstanding FY 2008 contracts.
“We know this kind of proposal will be very hard for BMA and other suppliers to accept,” the Japanese source said. “We want to talk to our suppliers on a commercial basis, not on a legal basis,” the source added. The Japanese coal buyer also said that the FY 2007 price of $98/mt FOB for prime hard coking coal “is too low” as a price settlement for FY 2009. He said he personally believes that FY 2009 prices should settle at between the FY 2007 and FY 2008 prices, suggesting a price of $120 to $150/mt FOB.
“We don’t want our suppliers to go under. We have to think of future availability of coking coal. Pressuring suppliers to agree to very low prices for 2009 will not be good for buyers in the long term,” the source said.

Iron ore contract prices may fall as much as 50 percent this year amid a slowdown in China, the world’s biggest consumer of the raw material, according to Australia’s richest woman and mining magnate Gina Rinehart.

“We’re hearing 30 percent, 40 percent, 50 percent discounts to last year’s contract price,” Rinehart, who controls closely held Hancock Prospecting Pty, said in an interview with Bloomberg Television. That compares with the average forecast of a 30 percent cut in a Bloomberg survey of 11 analysts last week.
Chinese steelmakers are likely to win their first cut in contract prices in seven years as a global recession curbs demand for commodities. Rinehart’s partner, Rio Tinto Group, the world’s second-biggest exporter of the ore, and Baosteel Group Corp. began talks this month to set prices from April 1, according to two company executives who asked not to be identified.
“The economy in China is very sad right now,” Rinehart said. China’s economy may rebound soon and ”ultimately, prices will rise,” she said. Hancock isn’t party to the talks.
Hancock Prospecting is partner with Rio in the Hope Downs iron ore project in Western Australia. Hancock is also seeking to develop the Roy Hill iron ore mine in Western Australia.
Rio, BHP Billiton Ltd., and Brazil’s Cia. Vale do Rio Doce, which handle three-quarters of traded iron ore, sell the steelmaking material under long-term contracts to China’s 20 biggest mills and traders at agreed annual prices.
China may be asking for a price cut of between 40 percent and 45 percent, Macquarie Group Ltd. analysts led by London-based Jim Lennon said in a Jan. 12 report. UBS AG analysts have forecast a decline of 40 percent. A 30 percent cut would still be the second- highest price on record.

Iron, coal prices to halve contract prices for Australia’s iron ore and coking coal exports are forecast to halve. The dour outlook comes from Access Economics, which expects the Australian economy to fall into recession as growth slumps in China. The crisis and the effects on the domestic economy are expected to deepen as commodity prices fall because of reduced global demand.

In its Business Outlook, the Canberra economic agency says the ”spectacular fall from grace” of commodity prices will slash tax revenue and cause businesses to shelve investment in infrastructure and project development.
There are concerns that, as mines shut down or reduce capacity, the benefits of the next boom could be missed when the economy and the resource cycle turn.
“We’re amid the largest market meltdown in modern history,” Access says.
“Commodity markets came to this late but they saw the same shocking rout in pricing recently seen in many markets.
“We’ve long thought that commodity prices have had to come back, substantially so.
“We didn’t think the blow-up would come this soon or be quite this spectacular, but blow up it has.”
The Access analysis finds that spot market prices are back to the level of five to six years ago, with current weakness abolishing all of the gains.
The unprecedented rise in commodity prices delivered the Government a revenue windfall of at least $40 billion, causing the surplus to balloon.
As the credit crunch pushes the world into recession, Access forecasts that April contract coking coal and iron ore prices will be halved.
Access’s outlook is more negative than that of Goldman Sachs, which says iron ore prices will be off by up to 30 per cent as demand sours.
“Given what has happened to global steel prices, we expect coking coal and iron ore contract prices to be slaughtered come April, with steaming coal prices to also be hit hard,” Access says.
“It took four or five years for the good news to build on industrial commodity prices. It will take rather less than two years for the bad news to carve a very large and painful chunk from Australian incomes.”
In its broader outlook, Access said it believed mining output would be cut back to 7.8 per cent in the next two financial years but the greatest pain would be felt in the resources labour market.
As the national jobless rate edges up to 4.5 per cent, it is predicted that thousands of mining and resources jobs will be slashed as profits fall..
Access forecasts an 11.4 per cent decline in the number of mining jobs in the next financial year, as mining capacity is cut back.
But Access predicts the jobless figure will then rebound slightly to slow workforce growth of just 1 per cent.
“Mining has been the powerhouse of the Australian economy in recent years, with the income it earned encouraging a rapid lift in investment and firing up a bunch of other sectors,” the agency said.
The negative outlook for the Australian economy is now shared by NAB, which believes a technical recession will be narrowly avoided in the next year.
In a revised outlook, the bank’s economists tipped that the economy would contract by 0.2 per cent in the final quarter of the past calendar year.
NABCapital chief economist Robert Henderson said the prospects for the economy would be grimmer if agriculture did not strengthen after recent rains.
“Our current forecasts for Australia have the economy just missing by a whisker the shorthand recession definition of two quarters of negative growth,” Mr Henderson said.
“The forecasts include a strong contribution from the farm sector as the drought breaks and the rural economy bounces back.
“Under most definitions, Australia’s non-farm economy is in recession now and we will remain there until the middle of the year.”

Steel demand won’t recover before the second half and annual contract prices for iron ore will decline 20 to 40 percent, Fitch Ratings said.
Prices for steel and the raw materials used to make it may improve before then, Monica M. Bonar and Sean T. Sexton, analysts at Fitch in New York, wrote in a research note dated Jan. 2. Metallurgical-coal contract prices will fall about 20 percent, they said.
“Demand for steel should improve following the aggressive expansion of central bank liquidity provisions since early September,” the analysts wrote. A recovery would be led by China, they said.
Steelmakers are cutting output, jobs and investment as the world tips into recession. Luxembourg-based ArcelorMittal, the biggest steelmaker, plans to eliminate as many as 9,000 jobs and slash production by more than 30 percent.
“Earnings will generally be down substantially for the next 12 months from 2008, which benefited from a robust first- half,” the analysts said.

While TD Bank sees the commodities market starting to rebound in the second half of 2009, followed by more pronounced price increases in 2010, the World Bank believes that, over the long term, commodity prices will remain substantially below recent bull market highs.

“The commodity market boom has come to an end,” the World Bank says. This boom has been the most pronounced since 1900, and was caused by rapid demand growth which was not matched by supply growth. In a report entitled “Global economic prospects — commodities at the crossroads,” the bank says that the boom has ended because of slower GDP growth, increased supplies and revised expectations.

The World Bank does not agree with observers who say that the global economy is moving to a new era characterized by relative shortage and permanently higher commodity prices. Over the long run, commodity prices are expected to fall, but not to 1990′s levels, since such low prices will suppress exploration and new development in the resource sector.

Over the next two decades, GDP growth rates will slow down because of slowing population growth and moderating income growth, in turn putting a lid on commodity demand growth. Moreover, technological progress should improve the efficiency of both production and use of commodities, ensuring that supply keeps pace with demand.

The World Bank says that, while commodity prices are likely to be higher than they were in the 1990′s and early 2000′s, a period when prices were depressed by excess supply, “the recent peaks (in prices). .. are unlikely to be the new norms,” since demand is not expected to outstrip supply over the long term.

The World Bank sees a marked slowdown in growth rates in the coming year. The bank projects that in 2009, investment in developed economies will shrink 3.1%, while investment in developing economies will grow by 3.4% — a sharp pullback from the 13% growth seen in 2007. The bank forecasts that the global economy will grow by 0.9% in 2009. Developing economies are projected to grow by 4.5%, well below the 7.9% growth rate seen in 2007.

Phenomenal growth in China’s GDP has led to growth in metal intensity in the economy, defined as metal consumption per unit of GDP. This trend is explained by the boom in investment, manufacturing and exports in China. Currently, metal intensity in China is four times higher than in developed countries and twice that of other developing countries.

China’s metal intensity is expected to stabilize in coming years and then start falling as high investment rates in the economy moderate, and the movement of manufacturing capacity to China from the rest of the world likewise slows down. Another factor which will decrease metal intensity in China is the changing make-up of the economy, where the share of services will increase at the expense of construction and manufacturing.

If China’s metal intensity stabilizes and then falls in coming years, global demand growth for metals, which has exceeded GDP growth rates, should first decline to match GDP growth rates and then decline even further to below GDP growth. The World Bank forecasts that, between 2015 and 2030, the global demand growth rate for metals will be 2.7% per year.

Turning from metals to energy, the World Bank says that future energy demand growth depends heavily on the pace of technological innovation in the automotive sector. Energy efficiency in the transportation sector is key to moderating demand, since 75% of energy demand growth is projected to come from this sector.
The World Bank believes that the prospects for technological improvements in the automotive sector are good, using technologies such as flex-fuel, hybrid cars, plug-in hybrids, electric cars and hydrogen-powered vehicles. Together, these have the potential to double fuel efficiency. The bank believes that, by 2050, the market share of such innovative vehicles can reach 90% in the developed world and 75% in the developing world, which will help reduce dependence on oil.

The bank forecasts oil consumption to grow to 114 million barrels per day in 2030 from 87 million today. Energy consumption as a whole is projected to grow at a faster pace, since consumption of other energy forms (such as coal, natural gas etc.) will grow faster than oil demand.

“Over the next 20 years, supplies of extracted commodities are likely to remain ample,” the bank says. The pace at which supply in the oil and metals sector catches up with demand depends on how quickly the supply of labour and supply in the heavy and specialized equipment sector can be restored. Capacity in these sectors has been reduced by years of low prices and weak investment, leading to long delivery times and high costs.

Recent high prices have helped address these capacity constraints. With the current recession, and with lower commodity prices, investment demand has fallen, and demand for specialized and heavy equipment has fallen in tandem, as have equipment prices. Despite this, prices are projected to remain relatively high and there will be a backlog in equipment deliveries for the next several years.

Although more and more resources, both metals and energy, are extracted every year, which means that less and less remains, it is unlikely that resources will be exhausted anytime soon, the bank says. Historically, reserves of both oil and metals have tended to rise faster than the depletion rate through extraction. In the case of oil, reserves have tended to remain at 40 years of anticipated consumption. This is because, when companies tally reserves, they tend to include only resources that can be readily extracted, which excludes sizable known resources.

The bank expects that more resources will be discovered, even though they are likely to be lower grade or more remotely located, and therefore more difficult and costly to produce. Nevertheless, advances in extraction technology will likely offset these impediments. The long-term oil price is expected to be US$75 per barrel in real 2008 dollars, a level which will allow economic production from oil sands. The bank expects that the oil price will also average US$75 per barrel in 2009.

Even if the World Bank’s projection turns out to be partly wrong and certain resources do become scarce, the bank says that alternatives will start coming into play. For example, if the pace of oil discoveries declines, the rising oil price will make alternatives such as coal, nuclear, natural gas and renewable energy more attractive, as well as stimulate conservation and technological change. However in such circumstances alternative energy sources will also become more expensive.
The World Bank summarizes its forecast by saying that under reasonable assumptions the supply of commodities is likely to increase rapidly enough over the long run to meet anticipated increases in demand at prices that are lower than the current levels. (The report was issued on November 20, when commodity prices were somewhat higher than now.)

TD Bank economist Dina Cover focuses on short-term prospects for commodities. She has downgraded prospects for the global economy in 2009, projecting growth at a mere 0.5%. The U.S. economy will shrink by 2%, and growth in the Chinese economy will slow to 7.6%. Since the U.S. and China are the world’s largest consumers of many commodities, demand will be hit hard, particularly for oil, coal and industrial metals.

As a result, the TD commodity index is projected to fall by 15% from mid-December levels, for a 60% peak-to-trough decline, and it will bottom in the second quarter of 2009. This may drag the Canadian dollar further down, which should help cushion the effect of falling commodity prices on mining companies.

Energy and base metal prices will decline the most, since both consumer and industrial demand for these commodities will decline. Although some mining companies, notably zinc and nickel miners, have slashed production, demand has fallen much more, so prices will remain under pressure in the short term. For example, the oil price is now expected to bottom at US$30 per barrel.

As for gold, TD forecasts that fears about deflation and disinflation could put downward pressure on prices in the near term, but a projected drop in the U.S. dollar in 2009 will support the gold price.

The global economy will start firming toward the end of 2009 and into 2010, lifting commodity demand and prices. TD projects a 55% rebound in the TD commodity index by the end of 2010, led by more than doubling of the oil price to US$75 per barrel. Excluding energy, the index will rebound by only 22%. Commodity prices are not projected to reach their boom peaks, since global economic growth in 2010 is forecast at a lukewarm 3.2%, substantially below the 4–5% growth rates seen during the boom.

Another factor which will limit commodity price appreciation is lower investment demand, since other asset classes will also rebound, so they will compete for the same investment dollars.

TD projects that oil will cost US$45 per barrel in December 2009, rising to US$75 in December 2010. Thermal coal in Australia will cost US$65 in December 2009, rising to US$100 in December 2010. The silver price will be US$9.60 per oz. in 2009, rising to US$10.50 in 2010. Aluminum will cost US75¢ per lb. in 2009, rising to US$1 in 2010. Copper will cost US$1.50 per lb. in 2009, rising to US$1.80 in 2010. Nickel will cost US$5.15 per lb. in 2009, rising to US$6.50 in 2010. The zinc price is projected at US48¢ per lb. in 2009 and US70¢ in 2010. Uranium oxide is projected at US$52 per lb. in December 2009, and US$65 in December 2010.

TD forecasts that the only commodities which will see price falls between 2009 and 2010 will be gold and newsprint. The gold price is projected at US$815 per oz. in December 2009, falling to US$700 in December 2010.

Reduced global steelmaking in 2009 will cut demand, push supply into surplus and halve the price of coking coal, forecast analysts Alan Heap and Alex Tonka at Citigroup Global Markets. They forecast that global steel production will fall 4.2% next year-to an estimated 1.403 billion metric tons-as mills continue to cut production in the face of weakening demand.

Under such a scenario, Heap and Tonka expect coking coal prices to fall 50% to an annual average $150/metric ton next year. “Spot prices had gone to the moon, to record levels, before the financial meltdown,” says Jim Thompson, editor of Coal & Energy Price Report, an industry newsletter, who expects 2009 prices to settle around $200.

Spot prices for metallurgical coking coal used to make steel increased as high as $300/metric ton throughout Asia in the first half of 2008 (depending on supplier and buyer), up from an average $120 in 2007. The price was due to strong first-half steel demand in India, China and some other Asian nations-and to numerous supply problems. The regional disruption hasn’t affected prices in the European Union or North America, where the delivered price of $110 was only slightly above the 2007 average of $95.

Steelmakers in China already have begun lobbying for calendar-year pricing for iron ore, rather than fiscal-year contracts-and some analysts expect the same to happen in the coal contracts. “Many U.S. steelmakers already have settled on 2009 prices, which were phenomenally high,” says Thompson of the Coal & Energy Price Report. “I doubt those settlements will sit now and suspect they will be renegotiated.”
Heap and Tonka add that “this cycle has seen an unprecedented level of steel production cuts,” so the Citigroup analysts believe that continuing curtailments in production are likely to result in delays to price settlements. “Neither producers nor consumers see it in their interest to settle annual prices in such a turbulent market,” Heap and Tonka write.

Demand for metallurgical coal next year will be 7% lower than in 2008, as global steel production continues to drop, a new report from Credit Suisse says.
World steel production contracted a year-on-year 12% in October and the investment bank says the markets are concerned steel production could go down by as much as 20% next year.
But that forecast seems “overly pessimistic” the investment research arm of Citigroup Global Markets notes in its Dec. 17 note to clients, especially when one compares it with the biggest downturns in steel production since 1900 (apart from the Great Depression and War years). World steel production fell 7.5% in 1958; 9% in 1975; 8.9% in 1982 and 4.4% in 1991.
Major steel production cuts will persist in the first quarter of 2009, however, and Credit Suisse warns that “there needs to be a swift response from the met coal producers.” (Hard coking coal is a basic ingredient of blast furnace based steel production.)
Credit Suisse forecasts that coking coal prices in 2009 will bottom at US$135 per tonne, US$113 per tonne and US$108 per tonne for hard coking, PCI and semi-soft coals.
In terms of thermal coal, Credit Suisse predicts a 2% supply surplus in 2009. As for demand, “2009 is likely to see the lowest growth in thermal coal imports on the internationally traded market for nearly two decades at 0.5%.

Government interventions, particularly in China, are likely to distort many commodity markets, resulting in even lower prices as producers maintain production levels thanks to government subsidies and tax cuts, Citigroup said in a report Wednesday.
China has reduced electricity tariffs and lowered export taxes to help the aluminum industry, and cut export tariffs on flat steels. India has repealed an 8% export tax on iron ore fines and reduced taxes on lump product to 5% from 15%.
“We believe government subsidies could remain in effect for many years,” Citigroup said. “Just as the developed world seeks to protect and support automotive and banking industries, developing economies will seek to support their relatively new smelting and material industries.”
China has yet to issue coal export quotas for 2009, but the government has removed price caps, a signal that export controls are easing, Citi said.
“Given the sharp slowdown in power consumption, thermal coal exports from China could sharply increase, a major risk to seaborne prices,” the bank said.
Acquisition Spree Renewed
China’s price interventions could also be stepped up as it mulls proposals to build government stockpiles, such as the State Reserve Bureau considering copper, aluminum, steel and other raw material purchases for strategic reserves, Citi said.
Meanwhile, Beijing appears to be encouraging renewed overseas corporate acquisitions to ensure secure raw material supplies in an environment where many companies are struggling to refinance debt and raise funds to develop projects, Citi said.
Only this week, China’s Shenzhen Zhongjin Lingnan Nonfemet Co. (000060.SZ) emerged as the main contender to win control of Australian zinc miner Perilya Ltd. (PEM.AU) by taking part in a A$45.5 million share placement.
Meantime, China’s Yanzhou Coal Mining Co. (1171.HK) is carrying out due diligence on coal miner Felix Resources Ltd. (FLX.AU) ahead of a possible takeover bid, according to a person familiar with the situation.
With increasing debt refinancing issues hitting the metals mining sector, merger and acquisition opportunities are becoming increasingly attractive, Citi said, but many companies and sovereign wealth funds “are still gun shy given losses on existing investments and continued deterioration in economic data, and may wait for a clear picture to emerge on 2009 demand.”

Steelmakers are suspending and renegotiating contracts with their raw-material suppliers as they grapple with the sudden drop in demand for everything from cars and appliances to bridges and buildings.

Some customers want suppliers to cancel or postpone deliveries. Others are simply refusing deliveries and buying their coal, iron ore and scrap steel on the spot market, where prices have fallen below long-term-contract prices.

The unilateral moves put suppliers in a squeeze. If they don’t agree to delay shipments or lower prices, they could be left with no sales at all. At Chinese ports, ships laden with unwanted scrap metal sit stranded while scrap sellers scramble to find new buyers. The alternative, sending the unwanted scrap back to the U.S, is cost-prohibitive.

ArcelorMittal sent a letter to its German scrap-metal suppliers, who essentially are beholden to the world’s biggest producer of steel, saying the steelmaker has been forced by the global downturn to suspend contracts with the suppliers as of the end of last month. ArcelorMittal didn’t confirm the existence of the letter, which was reviewed by The Wall Street Journal, but said it “has taken voluntary, prudent and responsible steps to align supply with demand.. .. We announced on 5 November we have suspended some raw-material deliveries.”

Likewise, India’s state owned Rashtriya Ispat Nigam Ltd. wrote to several of its metallurgical-coal suppliers this month, asking them to cut prices 68% for the contract year ending next June. The steelmaker said it hadn’t received a response as of late last week.

The U.S.-based Institute of Scrap Recycling Industries, which represents 16,000 companies in the U.S. and abroad that collect and resell metals, paper and plastics, met this month with the U.S. Commerce Department to discuss how Washington could protect and enforce contracts. The Institute’s main complaint involved Chinese scrap buyers who are canceling orders and insisting on renegotiating prices at ports after deliveries arrived. Institute President Robin Wiener estimated that busted contracts with Chinese buyers are costing his members “hundreds of millions of dollars.”
Generally, it is easier — and less expensive — to renegotiate contracts instead of going through the courts to enforce them, which can take years.

Buyers of scrap steel and other raw materials such as iron ore and coal need less of those products because demand for autos, appliances and buildings has decreased sharply. As demand has fallen, so have spot prices, which are frequently less than contract terms. Iron ore, for example, currently sells for about $70 a metric ton on the spot market. The contract price is about $90 a metric ton. That looked like a good deal when the contract was negotiated earlier this year and strong demand put the spot price at about $180 a metric ton. Scrap prices vary according to the metal and the quality. But many contracts for scrap steel were formed when spot prices were triple what they are now.

That means as steelmakers look to cut costs in the face of plunging demand, they prefer to buy ingredients on the spot market. But doing so involves getting out of long-term contracts.
Rather than have some customers walk away from contracts, the world’s biggest provider of iron ore, Cia. Vale do Rio Doce, said it is trying to renegotiate volumes, but not prices. It did as much with ArcelorMittal, CVRD said.

BHP Billiton, another large iron-ore producer, said some of its smaller customers, who are having difficulty obtaining credit, are trying to buy iron ore on the spot market and attempting to alter contract terms. “Many are saying I want to take the tons, [but] please don’t ship it in December, ship it in April,” said Alberto Calderon, BHP’s chief commercial officer. BHP said it is working with those customers and selling the iron ore contracted for December delivery on the spot market — at below-contract prices. BHP said it is generating less revenue than expected on the iron ore but is still making a profit on it.

Australian iron-ore producer Mount Gibson Iron Ltd. said earlier this month that three of its customers had defaulted on their contracts and refused shipments. As a result, the company had to find new customers, who agreed to buy the iron ore, but at a lower price.

Commodity markets have got off to what appears to be another rough week, with BHP Billiton Ltd.(BHP) confirming it has been asked to defer up to 5% of planned iron ore deliveries this year and Macquarie Bank sharply lowering its 2009 price forecasts for most raw materials.
Even the coking coal market, so far seen tight because of some spill-over demand from earlier months when infrastructure constraints and production losses limited shipments, is eventually moving to a surplus.
Despite severe flooding in Queensland which cut production earlier this year, the coking coal market will end the year with a 11 million metric tons surplus, Macquarie’s Commodity Analyst Jim Lennon said in a report Monday.
In addition to cementing the view that the global economy could take several years to recover from the current crisis, the continuation of bad news could mean commodity prices have further room to fall before a floor is found in most cases.
“Bulk commodities are late-cycle commodities, and we can say with some confidence that they will be hit hard come negotiation time,” said ANZ Commodity Strategist Mark Pervan. In early 2008, benchmark coking coal prices tripled and iron ore prices nearly doubled on the year to record highs.
Iron ore price negotiations for 2009, between Chinese steel producers led by Baoshan Iron & Steel C. Ltd (600019.SH) or Baosteel and key global mining companies such as Brazil’s Companhia Vale do Rio Doce (RIO) or Vale, Australian miner Rio Tinto Ltd. (RTP) and BHP are expected to start soon.
That could also set the tone for coking coal prices.
Slowing demand and exports from the U.S. and Australia’s Port of Newcastle prompted Macquarie to cut its coking coal price forecast for the 2009 benchmark contract by 60% to $140 a metric ton, from around $350/ton this year.
Macquarie now expects copper to average $1.70 a pound next year, down 43% from its previous forecast; aluminum is likely to average 90 cents per pound, down 31% from its previous forecast.
London Metal Exchange copper is currently trading around $3,710/ton, down nearly 60% from a record $8,940/ton in early July, despite producers announcing project deferrals and disappointing output at existing mines.
No Respite Seen Even After Next Year
The bad news for the market is likely to stretch into 2010, Macquarie said, lowering its forecasts for 2010 by 12% to 30%.
For bulk commodities, 2009 iron ore contract prices are now expected to fall 20% for Australian fines to $115.70/ton, and by 15% for Brazilian ore to reflect changes in the freight market, Macquarie said.
That is roughly in line with those of other analysts although some, such as UBS and ANZ, are forecasting a drop of as much as 40% in iron ore prices next year.
Slowing steel demand and falling steel prices have forced every iron ore producer, including BHP now, to re-state their forecasts for next year.
BHP, which Monday said it had received requests from customers for shipment deferrals of up to 5% of its 2008 iron ore production, worth around $600 million at current contract prices, was the last major miner to officially confirm a slowdown in demand.
Last week, Rio Tinto said it was cutting iron ore production at its Pilbara mine in Western Australia by about 10%. Before that, Vale, the biggest iron ore producer in the world, said it would cut 2008 production by 30 million tons, or 9% of annual output, in response to worsening market conditions.
Fortescue Metals Group Ltd. (FMG.AU), last week said its 2008 iron ore production will come in about 10% lower than planned.
The market is likely to get worse before it gets better, analysts said.
“There are three phases. We’re in the first with the current crisis… a very uncertain environment as it’s very early days. Signs are that we’re moving downwards. For China, the direction is distinctly downward,” said Michael Dixon executive general manager at Australian minerals consultancy AME AME.
China is the biggest consumer of most bulk commodities such as iron ore and coking coal and it was slowing Chinese demand that led to the sudden deterioration of market sentiment in recent months.
“The current crisis only really started two months ago, leading on from the banking crisis, and a recovery might be up to three years away,” Dixon said.
More Steel Output Cuts May Follow
Fourth-quarter steel output cuts of more than 30% at the world’s largest steel maker, ArcelorMittal (MT), as well as Corus and other companies around the world, is leading to a sharp downward correction, with global steel production expected to be cut by 12% to 15% on year during the current quarter, Macquarie said.
Recent economic data suggest more output cuts may be likely.
Aside from the euro-zone economy shrinking by 0.2% during the third quarter, Japan’s government Monday said the world’s second largest economy had entered a recession with a second straight quarter of economic contraction, shrinking by 0.4% on an annualized basis.
Against this backdrop, demand for steel making raw materials, such as scrap, coking coal and iron ore, has “clearly collapsed,” leading to plunging freight rates and lower spot prices, according to Macquarie.
While UBS and ANZ expect iron ore contract prices to fall by 40%, while AME thinks coking coal prices will drop to about $200/ton or less.
“The production cuts among end-users highlight the downside risk to these markets, and we haven’t yet seen all likely steel production cuts,” said Pervan.