2017 saw growth in global steel and raw materials markets driven by several fundamental improvements: synchronized global economic growth, the devaluation of the USD, increasing steel demand both in China and globally, continuing steel capacity cuts in China and the slow reaction of supply to higher prices due to production limitations.
In 2018, with global economic growth forecast to continue and support increasing steel demand, steel margins are expected to gradually decline to more sustainable levels. Chinese steel consumption will be stable y-o-y, while China will maintain its environmental restrictions on steel production. Analysts forecast an increase in supplies of raw materials.
The Russian economy is set to trend in line with 2017: gradual economic and steel demand recovery, low inflation, decreasing interest rates and marginal rouble depreciation. Meanwhile, developed economies will face bubble risks. Monetary tightening in the USA and a stronger USD could present a challenge to the stability of developing countries.
Steel analysts believe that China’s programme to cut electric arc furnace and basic oxygen furnace capacity is progressing in line with government targets, and all induction furnace capacity has now been shut down. China’s total carbon crude steelmaking capacity fell to around 1,020 Mt.
China’s campaign to tackle air pollution by addressing overcapacity in the steel industry has benefitted steel producers. It has boosted margins, restoring hope that the era of cheap steel is drawing to a close. Further transformation of China’s steel industry, including further capacity cuts over the winter, is likely to offset slowing demand. Reduced capacity will lead to higher levels of utilisation, this will increase marginal costs and steel prices. Sberbank CIB, Sep 2017.
Hard coking coal, FOB Australia, $/tn
- Coking coal prices currently exceed marginal costs for producers
- Steady demand for coal is being driven by high levels of steel production in China and a stronger steel margin
- HCC spot prices are expected to decline in 2018 reflecting Chinese production cuts in Q4 2017 and Q1 2018 to curb emissions, as well as significant supply disruptions in 2017 (storm Debbie) and high prices in Q1 2017 (reaction to the Chinese 276 days policy). In addition, stalled growth in Chinese steel demand in 2018, new capacity expansions (Mozambique, Australia) and seaborne marginal costs at $110/tn will put pressure on prices.
- Meanwhile, prices will be supported by: growth in global steel production, increasing costs for Chinese coal producers, the restructuring of the Chinese coal industry, voluntary supply restrictions and higher demand for coal following the closure of illegal induction furnances in China.
Iron ore, Fe 62% CFR China, USD/tn
- Iron ore prices are supported by high levels of steel production in China
The price of iron ore is expected to decline from an estimated $74/tn in 2017 to $57/tn in 2018 due to:
- Steel production restrictions in Q4 2017 and Q1 2018 in China for environmental reasons
- Increasing supply from Big-4 (Vale’s S11D, Australia) and other producers, with seaborne marginal costs estimated at $55/tn
- Possible tightening of credit conditions in China following the 19th CPC summit
- No growth in Chinese steel demand in 2018
- High iron ore inventories in China
Factors supporting prices are:
- Global steel production growth in 2017–2018
- Higher demand for iron ore following the closure of illegal induction furnaces in China
- Demand for high quality iron ore in China to satisfy environmental standards
Russian steel prices are expected to decline from an estimated $520/tn in 2017. Fundamental factors such as anticipated iron ore and HCC price reductions, possible tightening of credit conditions in China following the 19th CPC summit and a forecast of no growth in Chinese steel demand in 2018 will likely result in a decline in steel prices.
At the same time, several factors will provide some support to steel prices: production restrictions in Q4 2017 and Q1 2018 in China to reduce environmental emissions, global steel demand growth, capacity cuts in China and lower supply following the closure of illegal induction furnances in China.
Inflation and CBR rates decline
Monetary Policy Rate in%
Note: 1-Week Repo Rate in %
Source: Central Bank of the Russian Federation
Russia’s Central Bank (CBR) (the “Bank”) resumed its easing cycle on 18 December, cutting the key rate from 8.25% to 7.75%. The move followed a pause in July, meeting the expectations of market analysts. The Bank’s decision was driven by favourable price dynamics as inflation had fallen notably in recent months, creating space to ease rates. However, volatility in food prices, fluctuations in global commodities prices and shifting inflation expectations limited the size of the cut, and the Bank emphasised in its accompanying statement that a moderately tight monetary policy is still required. Looking forward, the Bank signalled that it would likely cut the rate again, stating that “it deems it possible to cut the key rate further”.
Economists see the Central Bank lowering the monetary policy rate further in 2018, with a Consensus of 7.03%. Focus Economics, Consensus Forecast, CIS Countries, Oct 2017.
Inflation in 2018 is expected to be broadly in line with 2017, reflecting CBR’s inflation target of 4%, weak consumer demand due to lower household real incomes, restricted government spending and marginal rouble depreciation.