Supply/demand imbalance returns, prices decline in 2022: Moody's

Posted on 15 September 2021

A worldwide supply/demand imbalance for steel will return through 2022, and steel prices will gradually decline towards their historical averages from the unusual highs of 2021, says Moody’s.

“Steel demand will ebb as buyers replenish inventories, stimulus spending wanes, and consumers return more widely to spending on experiences as vaccinations become more widespread,” the credit rating agency says in a report sent to Kallanish. “Steel supplies will continue to increase as well, with productivity improving and new capacity coming online in certain parts of the world.”

Steel prices will settle higher than their historical levels in 2021-22 as demand increases for scrap and metallics, and as the steel sector's competitive dynamics improve with consolidation in some regions.

A quicker-than-expected economic recovery and the replenishment of inventories in 2021 created a temporary dislocation of supply and demand. Meanwhile, consumers used stimulus funds, unemployment payments and discretionary dollars to purchase goods rather than pay for experiences that the coronavirus and pandemic measures made largely unavailable, Moody’s points out.

Iron ore prices will meanwhile move gradually towards their $70-$80/tonne average levels of 2016-19 beyond 2022. Tight supply will keep prices above their historical norms through 2022, but prices have retreated from their peaks earlier in 2021 as supplies have increased and demand growth decelerates.

Restrictions on steel production in China limit future demand growth for iron ore. Margin compression of Chinese steel producers is leading to higher use of lower-quality iron ore for now. The spread between 65% Fe and lower-grade 62% Fe iron ore has narrowed from record levels earlier in 2021, but remains high at nearly $30/t.

“Despite this short-term effect, we expect high-grade demand to remain firm, since the lower impurity levels of 65% Fe support steel production with lower emissions,” Moody’s observes.

Metallurgical coal prices are expected to stay robust in 2022 on steel industry strength, but earnings will taper by the fourth quarter of 2022 amid tougher on-year comparisons.

“An eventual resolution of trade issues between Australia and China will start to normalise prices, even in the US, where met coal producers have exploited that dispute by exporting coal to China, and key reference prices on the East Coast remain elevated,” Moody’s says. US miners will see a significant expansion in earnings and cash flow in the second half of 2021 and 2022 after a difficult 2020.

Source : Kallanish