Steel, iron ore markets to rebound: UNCTAD

The steel and iron ore industries are forecasted to make a strong recovery in 2010 before leveling out, according to the Trust Fund Project on Iron Ore Information’s latest report.

The trust fund, which is administered by the secretariat of the United Nations Conference on Trade and Development (UNCTAD), was founded in June 1989 to collect and analyze information on the iron ore sector.

The following is a condensed and edited version of the organization’s findings.

In a recovery that has taken at least a year, steel is finally climbing towards the light, thanks to a strong recovery by the Chinese economy — far quicker than popular opinion expected.

According to the latest International Monetary Fund forecast (which contributed data to the report) released in April 2010, world output is expected to climb by 4.25% in 2010, a stark comparison to 2009’s 0.5% contraction.

China proved to be the country with the greatest influence on the steel market recently, having shifted focus to consumer durables not intended for export. In the first two months of 2010, Chinese production of automobiles increased 89.7% from 2009. Over the same period, washing machine production increased by 47.5% and the production of refrigerators and air conditioners rose 45.8% and 27.7%, respectively.

The overall strength of China’s steel output from finished steel products to crude steel have flowed into the market, contributing to a healthy rate of growth.

On the demand side, data from the World Steel Association expected a 10.7% rise in 2010, which more than compensates for 2009’s 6.7% fall. Granted, both the World Steel Association and the Organization for Economic Co-operation and Development (OECD) expected greater declines in 2009.

On the back of positive data from January to April 2010 and an expected peak in output, world crude steel production is forecasted to be about 1,411 million tonnes. The report notes that this is 5% higher than the previous peak for crude steel production, which took place in 2007.

Looking towards the future, the trust fund predicts that supply will negate demand in China. A slow rate of growth for OECD countries due to restrictive monetary policies aimed at beating recession overhangs will slow import capacity. The report forecasts steel supply and demand will increase at an annual rate of just below 4%.

The iron ore market also looks promising to the trust fund. The report notes that although spot prices have declined from record levels in April, they are still high, since Chinese steel production continues to grow.

The trust fund explicitly notes that two events, both relating to China, will directly impact the future of the world market for iron ore. First, China’s recent display of versatility in terms of its ability to push its economy towards private consumption shows that in the future, the country will be less dependent on world demand for its manufacture exports.

Second, Chinese iron ore production is sensitive to prices and will likely not increase output beyond current levels.

The report points out the shift from a benchmark pricing system to quarterly price agreements with the spot market still playing an important role for index-based pricing. The trust fund predicts that the paradigm shift will make the market less transparent during the transitory period. Eventually, the trust fund sees the market eventually opening up formal trading of iron ore futures contracts.

Iron ore demand is expected to increase from 1,606 million tonnes in 2009 to 1,850 million tonnes in 2010.

The world market for iron ore will see tight conditions for years to come based on a few factors such as the world steel demand and production are 8-9% higher than 2007, the previous peak year.

Also, inventory hasn’t had a chance to build up since the recession, so the level of demand at the moment is an accurate depiction of market demand and not based on shifting inventories.

The Chinese iron ore industry has seen roduction fall by 200 million tonnes compared to 2007, despite prices having doubled in the past year. Iron ore mines worldwide are boosting production to meet demand.

The trust fund notes that although there is a large number of projects in the investment pipeline — implying that a surplus is likely — recent plans are “somewhat optimistic” as supply chains for equipment were already strained prior to the global economic meltdown. These projects will likely take longer to go online then initially predicted.

“We believe the market situation is not going to change very much over the next couple of years,” notes the trust fund.

Iron ore supply is expected to gradually catch up to demand with prices declining but staying at a high enough level to keep the Chinese iron ore mining industry producing about 225 million tonnes a year.

“This means that prices are likely to decline from present levels, but the decline will be relatively smooth and prices will remain at levels that must be considered high from a historical perspective with a floor at around US$90 per tonne,” the report concludes.

The report is available on the United Nations Conference on Trade and Development website www.unctad.org.