Platts Asia Metals Quarterly Trade Insight
Insights on key trends in iron ore, metallurgical coal, steel, scrap and alumina
Asia Metals Quarterly Trade Insight
S&P Global Platts digs through datasets and digests some of the key trends of the last quarter in iron ore, met coal, steel, scrap and alumina.
Looking ahead, we also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations in the spot market.
Authors
Samuel Chin, Melvin Goh, Jessie Li, Joanna Lim, Jeffery Lu, Marcus Ong, Keith Tan, Weng Yi-Le, Yiming Zeng
Editorial Lead
Julien Hall
Editors
Wendy Wells, Paul Bartholomew, Geetha Narayanasamy, Norazlina Jumaat
Graphics Editor
Junaid Rehman
Digital Editor
Barbara Lorenzo Caluag
Fits and starts mark China steel buying in new normal of virus comebacks
Chinese imports could slow as regional demand recovers
India's HRC exports to continue, benefiting rerollers
Billet demand sees fragile recovery in Southeast Asia
China's steel imports appear set to proceed in intermittent phases in the third quarter as the world enters a new normal in which returning waves of the coronavirus pose a constant threat to the nascent recovery in global steel demand.
Beijing's measures to buoy its economy will likely continue to support domestic steel demand and sustain its appetite for imports in Q3.
But even as this has cushioned regional steel markets from a hard landing, the uptrend in Chinese domestic demand and prices has not been spared from a brief punctuation when infections reemerged in the capital Beijing, recovering only after the virus was again bought under control.
As the rest of Asia gradually relaxes lockdown measures, unannounced comebacks by the virus like the one Beijing experienced will likely hang over the respite that steel markets are currently seeing, in which buyers who deferred shipments earlier have resumed taking delivery of cargoes.
Already, infection numbers are creeping back up in cities like Manila, Hong Kong, Tokyo and Melbourne and, in many cases, have led to a return to tighter controls.
The unpredictability of the when and where the virus reappears is a key factor that will decide whether the window for Chinese imports opens or not: China's infrastructure build-out will support domestic demand and make importing sensible as long as domestic cases don't make a comeback, but this trade flow could pause if regional demand picks up from other countries successfully staunching the spread of the virus.
When China restarted its economy in March after getting past the worst of the pandemic, hot rolled coil prices trailed behind those of rebar from mid-March through early July, as demand for the latter benefited more directly from infrastructure investments.
By early July, weak market sentiment had led some Chinese mills to consider resuming HRC exports.
But these thoughts were erased after the recent surge in domestic prices propelled HRC back above rebar.
A major state-owned mill in northeastern China was heard to have stopped taking orders for exports for September shipment in favor of supplying to the domestic market.
HRC's rebound was in part due to maintenance conducted at mills in May, which curtailed supply, and also because rebar demand was dampened by the longest rainy season ever recorded in eastern China and severe flooding.
INDIA'S HRC EXPORTS HINGE ON DOMESTIC REBOUND
If Chinese demand continues, interest in imports could be sustained in Q3.
In Q2, Indian steelmakers were a contributor to satisfying China's appetite for imported HRC as local demand was stymied by lockdown measures that have been billed as some of the world's most stringent.
Over April-June, Indian HRC deals for export to destinations in other parts of Asia surged to 1.1 million mt from 31,000 mt in Q1 and 170,000 mt a year earlier, spot market data compiled by S&P Global Platts showed.
The figure, culminated from 48 deals, was more than the total volume observed over the previous four quarters.
While lockdown measures have been eased in many parts of India in July, Maharashtra, the worst-hit state and an important industrial center, has seen its lockdown extended to July 31.
Indian mills will continue to be reliant on exports in Q3 as steel end-users that have resumed operations run through HRC inventories accumulated over earlier months, and migrant workers take time to return to cities.
VIETNAM REROLLERS SPOILED FOR CHOICE
Of the 48 HRC deals of Indian origin Platts tracked in Q2, China received 14 cargoes, while a greater 31 were headed to Vietnam.
Despite the apparent competition posed by China's importing of HRC, Vietnamese rerollers were spoilt for choice, thanks to ample supply from India and Russia, on top of what Formosa Ha Tinh Steel itself produces in central Vietnam.
Cracks emerged at the start of the year in Formosa's pricing mechanism, which saw it announcing a monthly offer that end-users bought on the basis of, with rebates given the following month if spot market prices were lower than the offer.
Formosa's offers, which had been widely followed by producers across the region as price guidance, broke down in April when difficulties in coming to agreement with end-users made it drop monthly announcements for one-on-one negotiations.
With Indian offers still being actively made into Vietnam in the first half of July, bilateral negotiations look set to continue being the modus operandi of price setting in Vietnam.
BILLET SEES FRAGILE RECOVERY
With billet, a similar situation has unfolded, although Vietnam has joined the ranks of India in supplying to China.
Platts observed 43 deals for billet amounting to 1.29 million mt done on a CFR China basis in Q2, exceeding the 22 deals for 760,000 mt seen the previous quarter.
As alternative demand from the Philippines, Thailand and Indonesia has recovered to 50%-60% of pre-COVID-19 levels, sellers in India and
Vietnam have raised offers to China amid several billet casters in Xuzhou in east China having shut since June 30 for capacity replacements.
Some market participants said the pace of China's billet imports could slow in Q3 if the spread between overseas and domestic prices narrows due to a recovery in overseas demand.
But the fragility of this recovery has already been seen, with a recent surge in infections in the Philippines prompting at least one rebar producer there to pause billet purchases.
Iron ore prices remain elevated despite rebound in supply
BHP sells higher portion on spot than main competitors
Alumina differentials track Brazilian supply closely
Blast furnace direct feeds attractively priced
China's iron ore demand could well defy both seasonal trends and a bleak global demand outlook to remain firmer than usual in the third quarter, but the increasing return of supply means prices are likely to come under more pressure than in Q2. The country's iron ore market was a global rarity in Q2, remaining firm as it emerged early from coronavirus lockdowns.
Seaborne iron ore prices returned to $100/mt CFR China at the end of May and have largely remained there since. Record crude steel production in China in May, the resumption of construction activity, and supply constraints in Brazil combined to keep the S&P Global Platts 62% Fe iron ore benchmark (IODEX) at historically high levels.
Amid unprecedented uncertainty due to the COVID-19 pandemic, weak domestic hot-rolled coil margins and relatively low iron ore port stocks in Q2, Chinese steel mills largely opted for medium and low-grades ores over higher grade material.
SUPPLY RECOVERY
Iron ore prices typically weaken in Q3 as steel production falls when construction activity in China slows during summer - just as Australian and Brazilian iron ore miners export at full tilt between their severe weather seasons.
Vale's seaborne exports from Brazilian ports recovered in Q2, despite issues at its Itabira mining complex, rising 14% from Q1 to 61.94 million mt, S&P Global Platts cFlow data showed.
The temporary closure at Itabira over early June largely impacted iron ore pellets, indicating that initial market concern it could result in a shortage of fines was overstated.
Australian exporters also recovered in the quarter from a cyclone-affected Q1. Supply in Q3, therefore, should be strong. Allied with weakening steel margins in late June, it suggests iron ore prices may come under more pressure in Q3 than they did in Q2.
Analysis of individual producers shows that BHP has sold at least 11% of its iron ore on a spot basis since 2019, compared with 9% for Vale and 5% for Rio Tinto. (Strip and portside contracts are excluded from the estimates and unreported trades by the miners for brands not included in index assessments may not be fully captured.)
In addition, cFlow data shows BHP's shipments rose by 12% on quarter and by 6% on year to 77.89 million mt in Q2, indicating the miner had more available iron ore to sell in the spot market.
Vale's strong exports in Q2 were reflected in a noticeable rebound in spot sales. The ratio had earlier been trending lower since the start of the year, in line with declining export volumes, before bottoming out in April.
Vale was also hit by canceled or postponed term contract shipments to customers outside of China, where steel production was reduced due to the pandemic.
ALUMINA DIFFERENTIALS DIP
Alumina differentials declined at the end of Q2 as Brazilian iron ore export volumes
recovered, and are expected to decline further in Q3 unless the coronavirus situation worsens in Brazil and impacts exports.
Lump and pellet prices came under tremendous pressure in Q2, falling to a two-year low as mills sought cheaper inputs to help manage margins.
On a per dmtu basis, lump was only around 2% higher than the IODEX by the end of June.
Price relativity between 64% Fe pellets and the IODEX also neared a historical low.
Demand for lump and pellets at Chinese ports has started to recover as current prices make them more attractive to mills.
However, port stocks for direct feeds are still high due to weaker demand in the EU and other markets, resulting in more material heading to China.
Furthermore, it takes time for mills to alter their blast furnace inputs, so excess supply will not be absorbed quickly.
High coke prices are also deterring mills from using additional lump, as breaking down lump requires more coke.
Mills typically use more direct input material when avoiding sintering for environmental reasons, but this is less of a factor in the summer months.
Although the influx of direct feeds has subsided as demand gradually recovers outside of China, a noticeable rebound in prices is probably still some time away.
PRICE OUTLOOK OVER $90/DMT: SURVEY
The IODEX has shown some recent signs of weakening, dipping below $100/mt on June 29, on the continued recovery of Brazilian shipments, weaker steel margins and rising Chinese port stocks.
Brazilian supply is expected to recover further in Q3, with Vale expecting its exports to China in calendar year 2020 to surpass those in 2019.
Chinese demand is usually quieter in Q3 as hot weather reduces construction activity and some mills typically take this opportunity to carry out scheduled maintenance.
What do you think will be the price of 62%-Fe iron ore at the end of Q3 2020?
- $90-$100/dmt
- $101-$200/dmt
- Above $120/dmt
- Below $90/dmt
However, the S&P Global Platts Iron Ore and Steel Outlook for Q3 found that only 29% of respondents surveyed expected China's iron ore demand would fall in the quarter, as steel margins were expected to remain supported by infrastructure and construction demand.
More than half or 52% of respondents expected iron ore prices to average $90-$100/mt in Q3, while 20% saw prices above $100/mt.
But a resurgent coronavirus outbreak in Beijing and temporary mine closures in Brazil in June point to a potentially weaker price environment in Q3 - and any number of unforeseen developments in the pandemic could change market dynamics in a heartbeat.
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BENCHMARK: Platts IODEX
The Platts Iron Ore Index, or IODEX, is a benchmark assessment of the spot price of physical iron ore. The assessment is based on a standard specification of iron ore fines with 62% iron, 2.25% alumina, 4% silica and 0.09% phosphorus, among other gangue elements.
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Scrap prices volatile as steel yet to regain luster
Japanese Q2 prices recover to pre-pandemic levels
Q3 outlook hazy; expects little improvement in demand
Market mulls return of Indian demand
After a volatile second-quarter, the Asian ferrous scrap market is hopeful for the third-quarter, although it remains a struggle to see strong bullish moves within the market.
"Prices have been fluctuating sharply this year, but if you notice the highs are short lived, and the overall direction was trending down," a Taiwanese mill source said.
"Though we do not see much factors in Q3 that could make the situation any weaker than Q2."
Asia's ferrous scrap market sailed through a choppy Q2 as prices surged against weakened steel demand, squeezing melting margins.
Since heading into the April-June quarter, Platts' Japanese FOB assessment for H2 material jumped 36%, or Yen 7,220 ($67/mt), from its trough of Yen 20,000/mt on April 1, to be assessed at a high of Yen 27,220/mt on June 10.
The Taiwan CFR assessment for heavy melting scrap climbed 29%, or $57/mt , from the $198/mt low on April 9, to peak at $255/mt on June 15.
Steelmakers, however, struggled to find the luster in steel sales, as downstream appetites all but disappeared amid the various COVID-19 pandemic-related lockdowns.
Electric arc furnaces in India, Japan, South Korea, Vietnam, Bangladesh, Indonesia, Malaysia, and Thailand had all reported lower production figures as demand slowed to a trickle, while steel inventories kept growing.
Q2 scrap prices, at elevated levels, were unstable and eventually succumbed to market forces, plunging the Japanese FOB and Taiwan CFR assessments by Yen 4,420/mt ($41/mt) and $25/mt to Yen 22,800/mt on July 1 and $230/mt on July 6, respectively.
South Korea, a key scrap importer in the region, reported a dismal Q2, importing only 1.13 million mt, 34% lower from the same period a year ago.
Vietnam's scrap imports slumped 22% to 1.22 million mt, but Taiwan bucked the trend with imports climbing 19% on the year to 0.99 million mt.
Taiwan's construction steel demand was unfazed, contrary to the fate of its regional neighbors, because it had successfully contained the pandemic, allowing its domestic mills to better control rebar prices in line with movement in scrap prices.
Q3: POTENTIAL BULL OVER BEAR FACTORS
For Q3, regional industry sources said the driving force for scrap will be the pace of steel demand recovery, especially since many countries are lifting lockdown measures, eager to jump start their respective economies.
"While pandemic infection numbers may improve in Q3, it may not translate immediately to an economic recovery, which is very important for steel demand," a Vietnamese mill source said. "Governments will need to promote public and private spending, which increases steel demand and production, and hence scrap consumption as well.
"The loosening of monetary policies and various governmental support beneficial to the steel industry would also help steel demand regain its shine.
"Steelmakers are hungry to get back to produce more steel, everyone is just waiting for downstream steel orders to return," a South Korean trader said.
And should there be more restarts and robust production for downstream manufacturing, construction, and reconstruction industries in Q3, it would lead to better scrap generation, and thus improve the overall scrap-to-steel cycle.
Moreover, India's eventual recovery from the pandemic would also provide an added support to scrap demand, "if and only if the situation improves," an Indian trader said.
"[COVID-19] cases continue to climb even higher in July. I have no clue when this will improve and it is still the monsoon season now."
Since India lifted its lockdown on June 1, mills were reportedly ramping up production to make up for sales lost during lockdown, with June crude steel output recording an 18% month on month recovery, while steel exports made a fourfold year-on-year increase, data from the state-run Joint Plant Committee showed.
China, whose demand for imported steel had returned in a timely and strong manner since March, and continuing even in July, has become the backbone of support to some steelmakers in India, Vietnam and Indonesia.
"The market is only so big," a regional trader said, adding that, "India wants to sell, Vietnam wants to sell. Indonesia wants to sell. Even Turkey wants a piece of the China action."
Metallurgical coal prices struggle to find clear trajectory
Met coal prices hit multi-year lows in Q2 as lockdowns cut demand
Spot prices may strengthen in Q3, but recovery uncertain
China's import policy, Indian demand remain the key questions
The seaborne metallurgical coal market is entering the third quarter amid more positive demand signals, with steelmakers lifting utilization rates after a challenging Q2, when premium low-volatile or PLV hard coking coal prices fell 23% from the average price in Q1 as the COVID-19 pandemic battered global demand.
The positive demand indicators are emerging as multiple countries ease lockdown restrictions, prompting steelmakers to make up for production losses in Q2. However, some question marks remain, particularly around China's import policies and the likely strength of India's demand for coking coal.
Market consensus is that metallurgical coal spot prices are likely to be supported in Q3, with fewer price fluctuations, as ex-Chinese steelmakers receive their term tonnage allocations, leaving fewer tons available for the spot market.
Metallurgical coal demand growth outside of China is expected to be subdued, with key markets such as Japan and India taking longer to ramp up steel production.
On the supply side, a slight decline is expected in Australian metallurgical coal exports.
S&P Global Platts Analytics estimates the world's largest seaborne exporter's volumes will fall 5 million mt year on year in 2020 to 185 million mt.
This is due mainly to production impacts. Seaborne prices are likely to fluctuate ahead of supply-demand fundamentals finding a balance.
BENCHMARK PLV FOB AUSTRALIA SPOT VOLUMES RISE 44%
Metallurgical coal spot prices fell to multi-year lows across all grades in Q2 as end-user mills reduced operating rates by 30%-50%.
This resulted in a throng of cargoes being redirected into the spot market, sending prices on a downward spiral.
Premium low-volatile hard coking coal benchmark prices averaged $118.45/mt FOB Australia in Q2, down 23% from the average in Q1 and down almost 29% year on year, S&P Global Platts data showed.
Spot transaction volumes observed by Platts fell 19% on year to 21.2 million mt in Q2, but were up 44% on Q1, driven by Chinese procurement amid weak prices and excessive spot supply.
INDIA TO INCREASE MET COAL, COKE IMPORTS AMID CHALLENGES
India's nationwide lockdown that began in mid-March resulted in spot trades falling 61% on year and by 78% on quarter.
At one point, India's privately-owned mills had cut production by 70%, according to Platts estimates.
Indian mills began lifting utilization rates in June, and the country is expected to increase its metallurgical coal and coke imports in Q3 due to the uptake of term contract volumes.
However, India's monsoon season is looming, and the economy is grappling with a credit crunch and manpower limitations that will ultimately impact its need for raw materials.
India's term contractual volumes should be sufficient to cover its current steel utilization rates, therefore any substantial return to the spot market appears unlikely in the near term.
UNCERTAINTY LINGERS OVER CHINA'S IMPORT POLICIES
China's import policies are expected to become stricter in Q3 as the country strives to contain imports to around 70 million mt, close to 2017 import volumes.
The policy has accelerated demand for premium materials, resulting in a higher price realization for PLV but lower for medium and lower grade coals in Q2.
The average spread in Q2 for PMV against PLV widened 7.4% in Q2, and by 19.2% for HCC, from the previous quarter.
Chinese buyers have been scouting for alternatives, such as imported metallurgical coke, which is subject to less scrutiny by authorities as it has less influence on domestic prices.
Term tonnage of metallurgical coke was redirected to China in Q2, when the country was running low on coke supply due to production cuts and strong demand from mills.
However, such opportunities will likely be fewer in Q3, as ex-Chinese steelmakers increasingly require their coke tonnages.
According to China Customs data, China imported 150,466 mt of met coke over January-May, up 196% from the same period in 2019 and up 712% from 2018.
Source: Chinese customs statistics
BOTTOMING CLOSE FOR SEMI-SOFT, BUT HINGES ON THERMAL COAL
Spot semi-soft coking coal prices hit a record low at $58.25/mt FOB Australia in mid-June as tighter port restrictions shifted demand to higher grades.
Market participants anticipate a near-term bottoming for semi-soft prices, considering the switch ability cost from thermal coal. The outlook for Q3 hinges on the recovery in thermal coal prices.
In both Q1 and Q2, semi-soft prices were below the implied breakeven price for thermal coal, leading to a sharp fall in semi-soft deals.
Source: S&P Global Platts
Australian coal producers with coal washing facilities were incentivized to produce more thermal coal given the better returns compared with semi-soft.
Based on Platts spot data, 2020 annualized spot trade of semi-soft coking coal is estimated at 1.2 million mt. This compares with 2.7 million mt in 2019 and a 5-year average of 3.4 million mt.
To calculate the price spread between semi-soft and thermal coal, Platts normalized thermal coal prices based on 5,500 kcal/kg GAR, which is roughly equivalent to 5,200 kcal/kg NAR coal, to typical semi-soft CV specifications of 6,700 kcal/kg NAR. This assumes an average $4.50/mt conversion cost and 90% yield rate of semi-soft from thermal coal.
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Alumina defies COVID-19 gloom with upswing, but weak economies pose challenge
Bullish Chinese aluminum boosts alumina imports
China's January-May alumina output falls 6% on year
Significant drop in downstream aluminum demand
The alumina story for the second quarter of 2020 was very much about recovery, propelled by unexpectedly strong Chinese aluminum demand, but the remarkable ascent may not be sustainable as the price of alumina is currently disproportionately high relative to aluminum, and seemingly at odds with the weak global macroeconomic environment, market participants said.
The price of alumina started Q2 on a bearish note, but its fortune reversed two weeks in.
After dropping to a year-to-date low at $224.50/mt FOB Australia in mid-April, also marking a four-year low, the market rebounded for the next two months and for
much of the quarter, boosted by Chinese appetite.
The Platts Australian benchmark ended the June quarter at $261.50/mt FOB Australia, and has since leapt further to $284/mt.
The two-and-a-half month ascent was a surprise to many participants in the market.
The majority of the world was in the grip of the coronavirus pandemic, with nationwide lockdowns in place and the global economy off the rails.
China, on the other hand, was reopening after nearly three months of lockdown, and revving up the local economy.
From April, the Chinese aluminum market became the underlying bull that fueled the price of alumina in China and globally.
CHINESE SCRAP SHORTAGE, PLANT RESTARTS BOOST ALUMINA, ALUMINUM IMPORTS
The front-month Shanghai Futures Exchange aluminum contract price spiked Yuan 2,590/mt ($370/mt) or 23% in Q2 to Yuan 14,070/mt on June 30.
The phenomenal climb began with a shortage of aluminum scrap, which boosted demand for primary aluminum. Some traditional scrap consumers were also drawn to primary aluminum when it became cheaper than scrap.
China's main sources of scrap are Europe and the Americas, and supplies were curtailed due to transportation bottlenecks, border closures, and reduced aluminum recycling activity due to COVID-19
restrictions.
These developments led to a spike in primary aluminum consumption in China as a substitute for scrap aluminum.
The country's high primary aluminum stockpiles accumulated in Q1 soon dwindled in April.
Additionally, the country's aluminum consumption also increased with the restart and ramp up of downstream processed aluminum plants post-COVID lockdown.
Strong Chinese aluminum prices pulled up domestic alumina prices, and fueled appetite for imported alumina.
SHFE ALUMINUM FAR STRONGER THAN LME ALUMINUM
Initially, London Metal Exchange aluminum was in total disconnect with the bullish Chinese aluminum market. With the rest of the world still reeling from COVID-19, LME was weak.
Then China began importing significant volumes of primary aluminum as well, and eventually LME values also rebounded in June.
The LME continued to lag the SHFE's strength, but did gain material ground.
Western smelting margins were, however, not remotely close to the fat margins that Chinese smelters were enjoying.
As for alumina, global margins were borderline decent but not comfortably wide.
"It [the alumina price] does seem a bit all over the place at this time," an international trader said.
"Such conflicting data in the market at present. Some sentiment seems bullish, but the actual physical metal market looks soft. The SHFE price is confusing to me," he added.
DISCONNECT BETWEEN ALUMINUM RISE AND WIDER ECONOMIC ENVIRONMENT
Market participants anticipate that in the short term, the price of alumina may continue to be supported. The underlying factor for this is China's aluminum output has been growing much faster than its refining rate.
According to National Bureau of Statistics data, China's metal output climbed more than 2% year on year between January and May to 14.81 million mt, while its alumina output declined 5.8% over the same period to 28.93 million mt.
Moreover, China has another 1.15 million mt/year of new smelting capacity slated to come online between July and September.
But for the longer term, market participants said they would be surprised if alumina and aluminum didn't come under downward pressure.
They voiced an uneasy sense of disconnect between the very bullish Chinese aluminum market and wider macroeconomic environment, and indicated that there may be potential downward pressure to come, for metal and alumina prices.
In China and globally, industrial activity is materially compromised, unemployment rates historically high and rising, and consumer confidence low.
On the one hand, Beijing and other governments across the globe are stepping up economic stimulus plans, with big infrastructure and construction projects. But are these going to be enough to carry the momentum in the alumina and aluminum markets?
Industry sources noted that the whole aluminum value chain has contracted. The reality is that there is a significant drop in downstream demand caused by the COVID-19 pandemic, with factory orders not only
canceled, but order renewals not coming in either, sources said.
