Posted on 23 Sep 2020
Strong Chinese iron ore demand and costlier CO2 emissions allowances are likely to keep production costs elevated for German steelmakers, says Peter Fertig, senior analyst at MBI Martin Brückner Infosource. Chinese steel demand and improving German steel end-use demand, however, should support hot rolled coil prices.
MBI Infosource foresees an average price for hot rolled coil of €441/tonne ($519) in 2020 and €459/t in 2021, for rebar of €457/t in 2020 and €488/t in 2021, and for wire rod of €498/t in 2020 and €550/t in 2021.
The Covid-19 pandemic has put more pressure on steel prices than on production costs. Although the global economy has suffered from the crisis, China has recovered quickly, driving up seaborne iron ore demand and therefore prices of the steelmaking feedstock since May. European flat steel prices, on the other hand, remained depressed until they stabilised over the summer and rebounded in August.
“When China experiences a crisis, the government always uses the same solution – massive infrastructure investment,” Fertig observed at Tuesday’s MBI Stahl Tag conference in Frankfurt attended by Kallanish. The subsequent increase in Chinese steel demand has been met to a large extent by imports from other countries, which has propped up global prices.
Chinese crude steel production is seen dropping in the second half of 2020 but will then rise in 2021 and remain above 2020 levels. Although Chinese domestic iron ore production will also grow next year, it will not be enough to meet demand, meaning Chinese iron ore imports should also be higher next year, Fertig said. On the supply side, issues still needing to be resolved in Brazil and a possible second Covid-19 wave could cause disruptions. This will surely keep costs high for blast furnace-based steelmakers in Germany and Europe.
China is seen growing crude steel output 5.4% on-year in 2020 to 1.046 billion tonnes and by 6.7% on-year in 2021 to 1.117 billion tonnes. Its iron ore production should grow 0.8% to 865.3 million tonnes and by 12.1% to 970.1mt respectively, while its iron ore imports should increase 11.8% to 1.197 billion t and by 10.4% to 1.321 billion t respectively.
German automotive market sentiment has improved in recent months, which should support steel prices. Earlier this year the German supplier industry working group ArGeZ index fell almost to the low seen in 2009, but has since rebounded to above 10 for the first time since 2008.
The eurozone’s M1 money aggregate has meanwhile rebounded to almost 55, which bodes well for German HRC prices with which it is closely correlated. “Expansive monetary policy is supporting a further rebound of industrial production,” Fertig commented. “This is still in negative territory but the direction is up.”
Owing to EU climate policy, however, CO2 emissions allowances could double in the coming years to €60/t, thereby raising electricity prices. If power and scrap are more expensive, this would also raise the cost of EAF-based steel production, which will be passed on to customers, Fertig concluded.
Source:Kallanish
