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MOSL: METALS-Higher RM impacting spreads of steel companies-Indian steel mills are however better placed

METALS: Higher RM impacting spreads of steel companies; Indian steel mills are however better placed

 

Higher iron ore prices impacting steel spreads

Iron ore (China CFR, 62% Fe) prices have shot up in the last few months to ~USD100/t (up ~40% since the beginning of the year, Exhibit 1), which has started impacting product spreads of steel companies (Exhibit 7). Vale’s tailing dam breach incident has impacted ~50-60mtpa of sea-borne iron ore supply (Exhibit 2). Chinese crude production growth, at the same time, continues at a healthy pace of ~10% (Exhibit 3). While, Chinese local iron ore output has not been able to catch up with the disruption in the sea-borne market; output grew by just ~1% in Apr’19 (Exhibit 4). As a result, Chinese iron ore stock at ports declined ~16% from its recent peak and is currently ~15% lower than same time last year (Exhibit 5).

 

While the outlook for Chinese steel demand growth remains tepid (WSA forecast is ~1% growth in 2019), the readings for the first four months of the year from China is showing healthy demand growth of ~10% (Exhibit 6). Escalation of the US-China trade dispute is a worrying trend, but reports suggest that the Chinese government will support the economy by increasing infrastructure spending and other policy initiatives. Higher iron ore prices should provide a floor to steel prices, while steady demand growth and improving visibility can drive product spreads higher.