China's latest trade data may be underscoring why iron ore and coking coal prices are currently supported well above longer-term analyst price estimates, as steel industry measures inject some optimism for miners.
China, which imported a record 1.07 billion mt of iron ore in 2017, in January hauled in 100 million mt, up 9.1% on a year earlier.
On Friday, Platts IODEX 62% Fe fines was assessed at $76.55/dmt CFR, compared to a 2018 Macquire forecast of $66/dmt, which was revised up in January from an earlier $54/dmt. The bank stated the upward revision to iron ore recognized "China's persistently high steel capacity utilisation rate should keep quality differentials wide," with lower purity grades.
A move to restock iron ore in China to prepare as mills return from winter cuts is promoting iron ore imports and use of higher quality iron ore grades, analysts at Commerzbank said this week.
A further longer-term adjustment to steel capacity may contribute to higher rates of steel utilization at remaining mills.
Steel utilization may be boosted as China brings forward by two years a wider target to cut 150 million mt of steel industry capacity. This may alleviate fears of lower domestic steel demand taking hold this year which could promote steel exports.
The country is expected to cut a further 25 million mt of steel capacity this year, after China cut 120 million mt/year of capacity excluding Induction Furnaces by the end of 2017, investment bank Macquarie expects.
Beijing's National Development & Reform Commission (NDRC) has implemented a wave of industry restructurings in steel and mining, closing induction furnace steel units to boost demand for blast furnaces and promote electric arc furnaces.
"Iron ore's price is expected to be supported by both second half 2018 seasonal restock and China's active and capacity-stretched steel industry," the bank's analysts said in a note Wednesday.
"Any moderation in government support for property/infrastructure sectors (approvals, credit) pose downside risk for trade demand/prices, as does year-end's seasonal pullback in demand, heading into winter."
Global indicative steel margins are high, as steel prices in Europe, the US and Asia rose on order demand, helping meet higher feedstock costs, and as China reduced steel exports.
Rebar prices in China and other markets such as the US are weaker, partly on seasonal factors, weakening metrics while flat steels are enjoying better regimes. Futures contracts in China on steel and raw materials may be aiding direction around the steel margin outlook.
China's finished steel product exports in January fell to 4.65 million mt, down 37% year on year. China's steel exports only reached 75.43 million mt in 2017, down 30.5% on 2016.
Lower steel exports from China may lead to stronger demand and output for steel made using seaborne raw materials in other regions. Lower steel and coke exports from China are cited as positive for international met coal miners given China produces most of its own coal and coke, and a sizable proportion of iron ore in absolute terms.
Coking coal prices find the threat of Australian cyclone disruption until early second quarter 2018 keeping the market on edge. Platts Premium Low Vol HCC rebounded to $227.50/mt FOB Australia this week, from $211/mt on January 29. The PLV benchmark adopted into industry contracts in January and December averaged at around $241/mt FOB, from $192/mt FOB in November.
Macquarie expects benchmark HCC to average at $184/mt FOB Australia in 2018.
The market has seen a rise in shipments from Queensland after vessel queues dwindled. Buyers seek to perform contractual volume from major suppliers in the Pacific and the US following delays over the past few months by mining geology, logistics and weather events.
In China, a spate of met coal restocking aided by a weaker dollar and better arbitrage for imports is keeping the spot market steady.
Macquarie said prices for thermal and coking coal markets are "now balanced between stable Asian demand from power utilities/steel mills vs NDRC's ongoing coal industry reform (including rolling out supply/price contracts and capping import prices)."
"But the ongoing lift in production from China's considerable domestic industry is a bear point for the seaborne trades," Macquarie said.
China's export blast furnace coke pricing -- in the mid $300s/mt FOB China -- is less attractive for steel mills. Given the timing risk for voyages into the Atlantic, Brazil and Europe buyers may be at a further disadvantage.
Mills may prefer to maximize coke production, using higher grade coal, or seek alternative material, supporting coke prices in Europe, Colombia and North America.