Steel Outlook Dims as Iron Ore Powerhouse Flags Growth Woes
(Bloomberg) -- The world’s top iron ore exporter cut its outlook for global steel demand, joining a growing chorus of warnings that trade tensions and slowing growth are hitting the sector hard.
“Risks to the outlook have risen in recent months, as a range of potential downsides emerge,” the Australian government said in a quarterly report, citing trade tensions, the possibility of an earlier-than-expected global downturn and prospects of a U.S. recession. World steel production and consumption will be lower than previously expected this year and next, it said.
|Global steel consumption||2019||2020||2021|
|New forecast||1.763b tons||1.780b tons||1.801b tons|
|Previous forecast||1.804b tons||1.803b tons||1.807b tons|
Top steelmakers globally have painted a bleak outlook for the sector as the prolonged trade war drags on growth and a first-half jump in iron ore prices hurt profits. Output in China, which accounts for more than half the world’s steel, faces competing pressures as falling domestic consumption is set against rising export prospects and potential stimulus measures, the report said.
As well as trade tensions, potential catalysts for a sharper global downturn include slowing U.S. growth, high debt in China, and a deterioration in Germany and other European countries, the Department of Industry, Innovation and Science said in the report. The overall effect remains difficult to project as many countries are likely to respond with stimulus measures that typically involve infrastructure development and greater production of steel, it said.
|Chinese steel production||2019||2020||2021|
|New forecast||911m tons||902m tons||930m tons|
|Previous forecast||940m tons||930m tons||926m tons|
On the raw materials side, iron ore prices -- that surged to more than $120 a ton this year after a fatal dam disaster in Brazil and supply disruptions in Australia -- are set to fall. The department predicts prices will drop to $57.50 a ton in 2021 and $61.40 in 2020 from an average $80.10 this year as the market returns to balance, maintaining forecasts from its June quarterly report. Projections refer to spot ore with 62% content, FOB Australia
The view from Australia, the world’s biggest iron ore shipper, joins other bearish outlooks. Morgan Stanley and Macquarie Group Ltd. rank iron ore among their least-preferred commodity picks and China’s largest manufacturer of special steel products has predicted a drop in prices in 2020.
China’s iron ore imports are set decline through 2021 and the country’s steel mills will use more scrap, according to the report. Australia’s exports are forecast to contract this year, albeit a smaller decline than previously predicted, before increasing in 2020 and 2021, it said.
Fresh evidence of the pressure China’s steelmakers are facing emerged on Monday as the industry’s purchasing managers’ index showed a contraction for a fourth straight month. The overall gauge was 44.2 for September, well below the level of 50 that’s the dividing line between shrinkage and expansion.
Other forecasts from the report:
- With the supply of high-grade iron ore from Brazil heavily disrupted, Chinese steelmakers have pivoted to lower-grade ores, leading to a reduction in the price premium for higher grades.
- Vale SA’s assets in northern Brazil continue to operate without issues and could potentially ramp up output through a restart at Brucutu and greater use of dry tailings stackings. At least one-third of the supply cut in the wake of January’s dam disaster is expected to persist for several more years.
- Vale, and potentially other iron ore producers, will focus on shifting from wet to dry processing over the next three years. While this will divert resources away from other potential expansions and may lead to some drag on Brazilian output in the short term, it is likely to improve stability of global supply in the longer term.
- India is set to become a significant influence on global iron ore markets as it industrializes. The country is expected to remain a small net importer of iron ore from 2020 onward.
©2019 Bloomberg L.P.