Back
26 Apr 2016
Australia's steel will not be their saviour - Nomura
Analysts at Nomura explained that while infrastructure investment is expected to remain robust, the impact on steel demand is unlikely to be enough to offset the decline in demand coming from weaker construction activities, according to the Australian Department of Industry, Innovation and Science (ADIIS).
Key Quotes:
"As a result, The WorldSteel Association expects Chinese demand for steel to decline in both 2016 and 2017. In the medium term, the Chinese government plans to tackle overcapacity in the steel industry, which should reduce demand for iron ore.
Supply side
On the supply side, iron ore production is expected to continue to increase as new lowcost mines are entering the production stage (like Roy Hill in Australia), compensating for the closure of some higher-cost operations.
According to the ADIIS, Australian supply should increase by 10% in 2016 and by 4% in 2017; for Brazil, it estimates increases of 7% and 6%, respectively. Moreover, it also notes that “the industry’s success at rapidly reducing costs has also reduced the price required to remain viable, which will limit the extent of any increase in prices.”
It is important to keep in mind that if prices remain elevated, some higher-cost operations that recently ceased production could restart, leading to a bigger increase in supply.
Continued oversupply
Taking into account the expected changes in supply and demand for iron ore, it appears likely that the oversupply in this market will remain, despite the recent price increase. This suggests that iron prices should decline, once the temporary increase in Chinese demand subsides. The ADIIS expects iron ore prices to decline to about $45 a ton in 2016, before improving to $56 a ton in 2017.
Key Quotes:
"As a result, The WorldSteel Association expects Chinese demand for steel to decline in both 2016 and 2017. In the medium term, the Chinese government plans to tackle overcapacity in the steel industry, which should reduce demand for iron ore.
Supply side
On the supply side, iron ore production is expected to continue to increase as new lowcost mines are entering the production stage (like Roy Hill in Australia), compensating for the closure of some higher-cost operations.
According to the ADIIS, Australian supply should increase by 10% in 2016 and by 4% in 2017; for Brazil, it estimates increases of 7% and 6%, respectively. Moreover, it also notes that “the industry’s success at rapidly reducing costs has also reduced the price required to remain viable, which will limit the extent of any increase in prices.”
It is important to keep in mind that if prices remain elevated, some higher-cost operations that recently ceased production could restart, leading to a bigger increase in supply.
Continued oversupply
Taking into account the expected changes in supply and demand for iron ore, it appears likely that the oversupply in this market will remain, despite the recent price increase. This suggests that iron prices should decline, once the temporary increase in Chinese demand subsides. The ADIIS expects iron ore prices to decline to about $45 a ton in 2016, before improving to $56 a ton in 2017.