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Metals pulse (November 2019) - Demand for restocking boosts domestic steel prices

Ferrous: Steel prices rise in China and India; we estimate further rise in Dec

Global steel producers respond to weak demand: Even though demand for steel remains weak in most countries, global steel producers have adjusted their production to adjust to the demand weakness (production down 2.8% yoy in Oct). China too recorded production decline for the first time in CY19, impacted by soft demand and in compliance with winter cuts. This has helped domestic prices in China to rise during Nov. Prices increased in the US as well, but Europe continued to witness price decline, despite ~9% yoy production cut in the EU. China’s sliding exports (down 14% yoy in Oct) suggest that exports from India (and not China) kept steel prices under pressure in the ASEAN region, which have now improved ~USD20/t in Nov. Even domestic HRC prices in China improved ~USD25/t from lows in Nov-19 to US$537/t.

Domestic steel prices rise in India; we expect further hikes in Dec: HRC retail prices rose by Rs1,000/t to Rs35,500/t in Nov, after having fallen continuously for 6 months. Similarly, primary rebar prices too increased by Rs400/t to Rs34,400/t. Our sources indicate that few domestic primary steel producers hiked long product prices by upto Rs1,500/t and HRC prices by upto Rs750/t in Nov. The price rise mainly came from demand for re-stocking at dealers’ ends. We expect prices to increase further in Dec by upto Rs1,000/t on continuous restocking demand.

Domestic iron ore prices stable, global prices range-bound: Global iron ore prices rose (CMP: US$89/t) in the latter half of Nov, as VALE reduced its CY20 guidance, but eventually averaged 4% lower mom to US$85/t in Nov. We expect global iron ore prices to trade above US$80/t for few more months, as global seaborne iron ore market is expected to remain in deficit. Surprisingly, NMDC cut prices by Rs100/t, in contrast to few Odisha miners, who increased prices by Rs100-400/t in Nov. We believe higher steel prices could cause NMDC to also increase iron ore prices in Dec. Moreover, progress in auctioning of iron ore mines and the premium paid to acquire these mines would decide the course for iron ore prices in India, in our view.

Iron ore mining auction to commence in Dec; JSPL emerged highest bidder for 6mtpa coal mine in coal auction: Government has invited bids for 19 iron ore and manganese mines in Odisha - the last date to submit bids for 10 mines was 28 Nov and for the remaining 9 mines is 4 Dec. We expect minimum disruption in iron ore supply during the transition period, post Mar 2020. JSPL has emerged as the highest bidder for 6mtpa Gare Palma Coal Block IV/1 at a premium of Rs230/t, in the auction held on 4 Nov. Premium for 5 other mines auctioned ranged between Rs154/t and Rs1,600/t.

Non-ferrous: Aluminium prices decline after short-lived stint above US$1,800/t; zinc too dips

Aluminium – Trade dispute resolution could have a positive bearing on prices: Aluminium prices jumped above US$1,800/t in early Nov on trade deal optimism, but failed to hold due to weak demand for the metal. This caused inventories at global exchanges (1.5mt) to rise by 20%, resulting in aluminium prices retracing to less than US$1,760/t levels (US$1,757/t). However, average aluminium prices were up 2% mom at US$1,767/t. Aluminium production fell 1.8% yoy in Oct 2019 to 5.4mt. Global aluminum producers like Norsk Hydro and Alcoa forecast aluminum demand is likely to contract in CY19 and have trimmed their CY19 forecast by 150-200bps, implying demand growth of (0.5)%-0.5% for CY19. However, both players expect aluminium market to remain in deficit at 0.8-1.4mt in CY19E. Global producers are adjusting production to cope up with the weak demand environment. We expect aluminium prices to remain range-bound in H2FY20E and average ~US$1,815/t in FY20E. However, resolution in trade disputes could positively impact prices.

Zinc – Still in short supply: Zinc prices averaged marginally lower mom at US$2,400/t during Nov 2019. Current zinc prices are lower 8% mom at US$2,286/t. Zinc consumption demand of 10.2mt (up 1.0% yoy) against production of 10.0mt (up 2.2% yoy) led to a deficit of 156,000 tonnes of the metal during 9MCY19. We expect zinc market to remain tight in FY20, as 1) Glencore has cut its production estimate by 85,000 tonnes in Q4CY19, 2) Hindustan Zinc has reduced its H2FY20 production guidance by 50,000 tonnes and 3) Vedanta (ex-HZ) has reduced its estimate by 80-90,000 tonnes for H2FY20. Global zinc inventories in LME are at ~4 days of consumption level. ILZSG estimates a deficit of 178,000 tonnes in global zinc market in CY19E, much lower than 507,000 tonnes recorded in CY18. However, zinc is expected to be in surplus of 192,000 tonnes in CY20E. As a result, we expect zinc prices to remain high in H2FY20 on short-term supply deficit and average US$2,550/t. However, prices could taper off to US$2,400/t in FY21E on improved supply.

 

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