Global iron ore & steel outlook - part one

By Freya Purnell

Calum Baker, research manager, steel raw materials, CRU, said while traditional iron ore markets such as western Europe, Japan, Korea and Taiwan all suffered in 2009, with steel production well down, in China steel production grew significantly – from 500 million tonnes in 2008 to an estimated 565-570 million tonnes in 2009 – an increase of 12-13 per cent.
In 2010, one of the factors influencing appetite for Australian iron ore is the proportion of ore in China to be supplied by domestic production versus imports, amid uncertainty over the sustainability of Chinese production.
Alan Heap, managing director of global commodity analysis, Citi Investment Research, told the Australian Journal of Mining, “Our view is that it’s going to prove to be more sticky than perhaps many think, especially if prices remain high.”
It’s not all about China, however – a recovery in the pace of crude steel production in the developed economies will also play a role. For example, in North America, capacity utilisation rates at steel mills are still at around 60-65 per cent, compared with a norm of 90-95 per cent, with a similar picture in Europe.
There is good news there too though, with blast furnaces shut down in the depths of the downturn now being fired up again.
“I think there is evidence that it’s progressively surprising on the upside,” Heap said.
On the supply side, the question is just how much of this growing demand across the globe will be met by Australia, and how much will come from rival iron ore exporter Brazil.
While Australia has a geographic advantage in terms of freight rates to China, Brazil is fighting back by building iron ore carriers which are more than double the size of typical vessels, with the aim of lowering their freight costs to get their competitively priced ore into growing Asian markets, Heap said.

Prices and production on the up and up
Aside from lingering concerns that there could be another global slowdown sparked by fragile financial conditions in many economies, economists are becoming more positive that the worst of the global financial crisis is behind us.
Although it certainly left its legacy on pricing of iron ore and steel in 2009, with general iron ore prices discounted by 30-35 per cent, according to Deloitte Perth office managing partner, Keith Jones, spot prices have remained strong and contract prices are expected to bounce back in 2010.
While Citi forecast an increase in prices of 15 per cent several months ago, Heap said the latest evidence from spot markets in China and the freight rates would imply a significantly higher price.
Jones predicts an increase of between 10 and 20 per cent, while CRU’s view currently is that benchmark prices will be up 30-35 per cent on last year’s level.
“There is certainly some upside there, which would be a good result for iron ore producers and would indicate a good year again for them,” Baker said.
Another consequence of the GFC was that Australian production did not grow as strongly as anticipated, with a number of producers delaying start-up or expansion on the basis that demand was expected to drop off, according to Jones.
“As it turns out, demand has been strong and production will continue to grow, with more suppliers coming into the market over the course of the next two years,” he said. However, one of the key obstacles Australian producers must tackle is overcoming infrastructure constraints to get their product to market.
Citi has forecast Australian exports in 2010 to be around 390 million tonnes, up from 360 million tonnes in 2009. Based on overall global demand and a balanced market model, CRU’s estimate for 2009 exports is currently around 375 million tonnes, with 410-415 million tonnes projected for 2010.

To read the final part of this story click here.

The Jan/Feb edition of The Australian Journal of Mining includes a special feature on Global Iron Ore & Steel – to receive your free trial copy click here.

AJM’s13th Annual Global Iron Ore & Steel Forecast Conference
March 23-24, 2010 – Sheraton Perth Hotel, WA
The next instalment of the AJM’s premier iron ore and steel event will be held at the Sheraton Perth and promises to be the biggest event yet. More than 120 executives have already secured their seats at the must-attend event of the year which attracts the highest quality range of industry players and commentators to present their views and forecasts for the year ahead.
The conference will address key pricing issues, the development of the iron ore index, production rates, new projects, as well as the challenges of infrastructure building and skilling the workforce.
The program also includes a number of social and networking opportunities for delegates to choose from.
To book your place, or to enquire about The 13th Annual Global Iron Ore & Steel Forecast Conference, contact tel: +61 (0)2 9080 4307 or email registration@informa.com.au