Policy meetings to set tone for Asian ferrous markets

Policy-setting meetings in China and the US this week will set the tone for Asian iron ore and steel markets in the coming weeks, with steel output cuts, weak demand recovery and raw materials' costs driving the market in recent weeks.

The meeting of the Chinese politburo is expected to shed light on the country's zero-Covid policy and measures to support the economy, with the country's economy posting a two-year low of 0.4pc year-on-year gross domestic product (GDP) growth in April-June. Chinese mills furthered steel production cuts last month in response to weak domestic and overseas demand. Costs for blast furnace producers have come down to around $430/t this month, Argus data show. This was down by 14.8pc on the month, based on the cfr China 62pc iron ore, fob China 62 CSR, 65 CSR average metallurgical coke and cfr China low-vol pulverised coal injection (PCI) prices. There is a cautious optimism building that the retreat in costs and the impact of production cuts will increase margins.

The US Federal Reserve's meeting this week will be watched, with an expected outcome of a further hike in interest rates. A stronger US dollar will add to seaborne iron ore costs and has implications for the seaborne-portside iron ore spread. The persistent premium for seaborne iron ore over portside levels earlier this year caught the attention of the market, with some questioning the fundamentals that supported the seaborne prices.

Expectations of policy support from the Chinese government was a key supporter of iron ore prices. But these expectations failed to meet reality. The peak steel demand period from the end of March to April was hampered by lockdowns to curb the Covid-19 spread in China, and the lifting of these restrictions from May has yet to push up prices significantly. China's weak downstream demand was highlighted last week by top Chinese steel producer Baosteel, which said that July and August would be the most challenging period for the industry this year. Participants are hoping that production cuts will help put a floor on prices despite poor demand from the property sector. Real estate sector investments in January-June fell by 5.4pc from the same period a year earlier, according to China's National Bureau of Statistics (NBS) data. New project start-ups by area in January-June fell by 34.4pc from a year earlier.

Steel demand in China typically picks up in September, with stocks built ahead of the Golden Week holiday in early October for a final sales push before the official onset of winter in November. This will also support iron ore prices. The 62pc iron ore index dropped to $96/dry metric tonnes (dmt) on 15 July, but reversed losses to end at $112/dmt on 26 July on expectations that steel output will pick up. Steel markets in China were flat on the same day, though hopes of a recovery in property sector demand emerged as real estate stocks moved up.

Steel output in China was down sharply in the second half of 2021 because of government-mandated cuts, weighing on iron ore prices. The policy calls for a lower on the year output this year, but did not quantify the cuts targeted. This means that mills do not need to cut output further in the second half of the year, as January-June output had already fallen by 6.5pc on the year to 526.8mn t, with current production rates on track to hit a lower year-on-year annual output. Mills will subsequently only ramp up production if they see signs of demand picking up.

The market expects to get more clarity on the government's infrastructure push, an important driver of steel demand, especially as the property sector unlikely to be unleashed. Chinese premier Li Keqiang said earlier in July that the country will not introduce supersize stimulus measures, issue excessive money supply, or sacrifice future interests to pursue an excessively high growth speed. "We will take a realistic approach and do the best within our means to strive for fairly good results in economic development for the whole year," the premier told the World Economic Forum.

By Deepali Sharma