2021 Global Metals Awards

China’s manufacturing production index of steel consumption produced by S&P Global Platts stood at 112 points in September, 2 points higher than in the same period of 2020. Meanwhile, output of manufactured goods linked to construction and consumption sectors, such as vehicles, home appliances and excavators, all remained below year-ago levels.

The index is based on China’s National Bureau of Statistics production data for 17 steel-related manufactured goods, which are categorized into seven sectors and weighted according to their share of steel consumption. The monthly production average in 2018 is used as the baseline of 100.

Some market sources expect steel demand in the manufacturing sector to stay sluggish through at least the rest of 2021, as slowing property construction might further dent the manufacturing of engineering machineries, while sporadic occurrences of local COVID-19 cases had also slowed the consumption recovery.

Demand outpaces supply

While the overall steel-intensive manufacturing output in September was still higher than in the same period in 2020, flat steel supply dropped below 2020 levels, partly as steel mills had to cut output to keep their 2021 steel output within 2020 levels, and partly as power crunch affected steel production across China.

The output of medium-wide hot-rolled coil – an indicator for the flat steel sector – in September declined 9.2% on the year to 14.18 million mt, according to latest data from the NBS.

As a result, the domestic HRC sales profit margin averaged $136/mt in September, up from $29/mt during the same period in 2020, according to S&P Global Platts Analytics.

Margins weaken in October

However, the HRC profit margin declined in October, as the market expected steel output to recover but demand to remain sluggish in the coming months. As of Oct. 21, the HRC sales profit margin has declined to $120/mt.

Some market sources said China’s flat steel production in October might actually stay as low as in September. However, they expect steel output to rebound, especially in December, as most steel mills should have completed their output cut requirements by November and power crunch should have eased from current levels.

Moreover, it remains to be seen whether winter steel output cuts in northern China will be implemented strictly, as steel mills might need to keep up operations to support residential heating if power shortages persist.

However, on the demand side, construction- and domestic consumption-related manufactured goods are unlikely to gain traction in the near term. Also, overseas demand for Chinese goods could soon taper in tandem with the recovery of overseas operations, sources said.

In September, production of machineries for metals smelting, cutting and forming, as well as the container and railway transport sectors saw year-on-year growth, contributing the most to the manufacturing production index’s rise. A pullback in overseas demand could dent at least some demand for machineries and containers, some market watchers said.

China announced on Oct. 22 support for lending to first-time home buyers, a sign that credit to the property sector has eased slightly amid downward pressure on economic growth. Meanwhile, China has been accelerating the issuance of local government special bonds in order to lend support to infrastructure in early 2022.

However, China’s construction activities, together with the need for engineering machineries, are unlikely to see notable improvement till the second quarter of 2022, some market participants said.

This report is part of the S&P Global Platts Metals Trade Review series, where we dig through datasets and digest some of the key trends in iron ore, alumina, steel and scrap, and metallurgical coal. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

The prospects of steel billet making inroads into China could continue to look up in Q4, bolstered by state-mandated cuts to crude steel output and power consumption, while at the same time and for the same reasons, there will likely be a dearth of imported recycled steel.

Against this backdrop of output and power cuts, however, China’s demand for billet will also be tempered by the direction iron ore prices take, even though in the case of recycled steel, higher scrap prices overseas will leave China struggling to make sellers look its way.

S&P Global Platts observed 142 spot CFR China billet deals, bids, offers and indicative price points in July, a jump from 86 in June, as iron ore prices hovered above the $200/mt mark. When clear signs as to the extent steelmakers had to cut production across various provinces emerged, billet became a more attractive alternative.

It is worth noting that most of China’s billet imports are sold via traders to non-integrated rerolling mills, mainly in the eastern province of Jiangsu, when prices are economically more attractive than buying domestic. There has, therefore, been no large move by integrated steelmakers to replace lost crude steel output through importing billet.

As iron ore prices plummeted in August and September, spot activity in billet also tapered, but was kept afloat by crude steel output cuts, which made domestic billet more expensive.

The prevailing weakness in buying interest for billet could persist into Q4 should demand in the property market soften and concerns over developers’ debt burden linger.

While September and October typically herald the peak steel demand season, it has, however, been lackluster this year. High freight costs and stringent pandemic-related measures for vessels calling at Chinese ports have hindered trade, but the emissions reduction-linked cuts to crude steel output seem to have surpassed these concerns.

Since early September, Platts observed an increase in the number of deals for billet of Russian and Middle Eastern origins that were last seen in May, while from Brazil was tracked last in May 2020 — all despite persistently high freight rates.

Trade flows from Indonesia, Vietnam, Thailand and India have also been steady as domestic demand for construction steel took a hit from lockdowns and pandemic control measures. Although, in most of these countries, the number of new infections appear to have passed their peak, which could mean a recovery in domestic steel use in the coming months.

Recycled steel imports subdued

Unlike billet, recycled steel gave China a wide berth in Q3, as crude steel output cuts dampened interest for scrap, while power cuts rendered standalone electric arc furnace-based mills inoperable.

Spot data for recycled steel on a CFR China basis tracked by Platts showed that activity dwindled from 54 in June to just 19 data points in July, and hovered at similar levels for the rest of the quarter.

Recycled steel imports are likely to stay depressed for the rest of the year, even though its usage, as opposed to that of iron ore, is considered of a lower carbon footprint and therefore in line with government policies, because prices in other parts of Asia, like key supplier Japan’s domestic market, are higher.

In the aftermath of crude steel output and power cuts, mills with an intention to buy would have had easy access to domestic recycled steel, cementing resolves to source locally rather than chase Japan’s high offers.

In Japan, strong Q3 crude steel output, that had gobbled up the country’s domestic supply of scrap, is expected to stay firm in Q4, according to its Ministry of Economy, Trade and Industry. This would continue to render its export offers uncompetitive to buyers in China and Southeast Asia.

METI projected Japan’s crude steel output to reach 24.11 million mt over October-December, a growth of 0.8% from Q3, led by stronger demand from the manufacturing sector, which is expected to grow 10.3% in Q4.

Even though Japan’s Q3 scrap exports were limited, the quarterly average of Platts H2 FOB Japan assessments had only slipped a marginal 0.6% to Yen 46,422/mt ($412/mt) from the previous quarter, indicating the strength of domestic demand and prices.

With Japanese mills showing no signs of reining in their scrap purchases, Platts H2 FOB Japan had reached a record high Yen 51,000/mt on Oct. 6, for the first time since the assessment was published in January 2016.

In addition, given the gradual easing of coronavirus-related restrictions and measures in Vietnam, Indonesia and Thailand, market participants expect regional seaborne prices to remain buoyed in Q4.

And as China has supplemented its iron ore imports with billet and pig iron, prospects of it importing recycled steel will continue to be subdued for the rest of the year.

This report is part of the S&P Global Platts Metals Trade Review series, where we dig through datasets and digest some of the key trends in iron ore, alumina, steel and scrap, and metallurgical coal. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

Alumina prices are expected to trail Chinese domestic prices closely in the fourth quarter after surging in late Q3 on the back of Atlantic disruptions, power restrictions in China and a rise in manufacturing costs.

The Platts Australian alumina daily assessment soared 59% through Q3 to close at $455/mt FOB Sept. 30, with the bulk of the gains recorded in September after prices hovered around $300/mt for most of July and August. In a similar trajectory, the Platts Shanxi daily alumina assessment surged 56% from July to close at Yuan 3,900/mt Sept. 30.

Alumina prices were under 13% of LME aluminum values for much of the quarter, before rising close to 16% in late September.

“The eventual gains we saw in alumina prices are not surprising, given that prices have been lagging as a percentage of LME aluminum values for a few months now, as well as that of Chinese domestic prices,” a consumer in China said in late September, referring to the Q3 spike in Australian alumina prices.

Atlantic disruptions tip balance

The Atlantic market grappled with supply disruptions in Q3, including a fire at the Jamalco refinery in Jamaica, damage to a bauxite unloader at Alumar in Brazil and a planned curtailment at the Noranda refinery in Gramercy, Louisiana due to Hurricane Ida.

Market sources deemed the Jamalco outage the most severe disruption. The facility is only expected to resume about 50% of production in mid-2022 after a major fire on Aug. 22 brought operations at the 1.4 million mt/year refinery to a standstill.

“That’s going to make the Atlantic very short for the foreseeable future,” a producer based in the West said following Platts’ report on the plant’s resumption timeline, which sources said was slightly longer than expected.

The Jamalco outage in late August marked the beginning of the upswing in alumina prices seen in September, with the Platts Brazilian alumina premium to Australian tons surging 67% within a month.

Market players with considerable exposure to the region rushed to cover their positions, and producers had to ensure that they had sufficient on-hand stock to fulfill their term contract commitments, bringing about further supply tightness on a global scale.

Notably, two deals concluded barely two weeks apart in September traded at a difference of $75.90/mt, with the latter concluded at $457/mt FOB Western Australia, underscoring the accelerated price surge in the month on the back of Atlantic tightness and skyrocketing Chinese domestic alumina prices.

China’s energy policies roil markets

Across China, environmental audits and power restrictions have ramped up in recent months. Production cuts brought about by renewed energy consumption targets and electricity supply shortages pushed prices sharply upward in Q3.

“The market appears to be going haywire due to nearly simultaneous announcements and renewed restrictions across China in the past week or so,” a producer said in late September, referring to the country’s updated “dual control” policy on energy consumption and intensity, and the abolishment of preferential power tariffs for the aluminum industry.

Alumina imports into China softened 25.2% on the month in August due to aluminum production curtailments and high freight fees but remained at the second-highest level to date in 2021 at 394,150 mt, behind only that of July, according to China customs data.

“The figures are underpinned by China’s sustained strong demand for alumina,” a consumer in China said in late September. The source attributed the continued demand to the upswing in aluminum prices and limited domestic alumina production due to power restrictions.

Dozens of sources in China, including consumers, traders and producers, said domestic prices had yet to peak and expected further increases while the industry continues to react to the new policies.

Outlook for winter unclear

Market participants across the aluminum chain are bracing for an unpredictable winter, and the jury is still out on how they will be impacted by a conflux of factors ranging from tougher power restrictions for businesses to the higher prices of inputs such as coal and caustic soda.

Heightened demand for energy has resulted in a shortage of coal and has sent electricity prices soaring globally as economies exit lockdowns. Governments are under pressure to secure sufficient electricity for households in winter, and the energy-intensive aluminum industry could face additional setbacks in the form of more power restrictions.

“The increase in coal-powered electricity prices could still support near-term alumina prices, even if smelters face production cut orders,” a trader said late September.

Sources are also eyeing new capacity for further market direction. The 1.5 million mt/year Anrak refinery in Visakapatnam, India is slated to be commissioned in Q4, with commercial sales commencing the following quarter.

In Indonesia, the Well Harvest and Bintan Alumina refineries, with 1 million mt/year of new capacity each, have postponed their timelines for commercial sales to early 2022, with sources citing the domestic pandemic situation as the main reason.

The 228,000 mt/year San Ciprian smelter in Spain has declared force majeure due to an indefinite strike, and a full resumption of production remains to be seen.

Meanwhile, the gradual full resumption of the 432,000 mt/year Kitimat smelting operations in Canada is expected to boost demand for alumina in the region. Production was previously reduced to about 35% of capacity following a labor strike in July.

This report is part of the S&P Global Platts Metals Trade Review series, where we dig through datasets and digest some of the key trends in iron ore, alumina, steel and scrap, and metallurgical coal. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

Asian iron ore prices are set to continue to face downward pressure from Chinese steel output curbs and power shortages in the fourth quarter after a dramatic price correction in Q3.

The iron ore index IODEX fell 46% in Q3 as widespread steel output curbs in China forced mills to resell contracted iron ore volumes, flipping the market into oversupply. However, different types of ore fared differently in the falling market, not only due to their own supply-demand dynamics but also external factors such as surging coke prices in China.

S&P Global Platts observed 88 spot deals for mainstream medium-grade fines from the top three miners Rio Tinto, BHP and Vale in Q3, slightly lower than the 91 observed in Q2, with a drop in spot sales from Rio Tinto partially offset by an increase from BHP.

Rio Tinto sold 18 spot cargoes of Pilbara Blend Fines, or PBF, in Q3 more than halving from 41 in Q2. BHP sold 59 spot cargoes of medium-grade fines — Newman High-Grade Fines (NHGF), Mining Area C Fines (MACF) and Jimblebar Fines (JMBF) — up from 38 in Q2 and 33 in Q1, as South Flank continued to ramp up production even as Chinese demand deteriorated.

Vale’s spot sales of Brazilian Blend fines remained stable at 3-4 spot shipments per month.

As prices collapsed and selling pressures mounted in Q3, miners moved from brokerage platforms to more flexible sales channels. Although spot sales decreased, Rio Tinto awarded nine strip tenders of PBF in Q3, more than the six strips it sold over the first half of 2021, while BHP sold more spot cargoes via open negotiations in Q3. Such sales channels allow sellers to get a full picture of all the bid levels before deciding whether to award the cargoes.

As the market became increasingly oversupplied, premiums for medium-grade fines brands fell sharply — even the most liquid brand PBF saw its premiums against the front-month IODEX drop from $13.35/dmt in July to around minus $1.30/dmt by mid-September.

Surging spot supply from BHP amid weak demand in September caused a correction for its lower-Fe medium-grade brands. JMBF and MACF saw their widest discounts against the front-month 62% Fe indexes in the past three years, at minus $21.90/dmt and minus $15.90/dmt respectively in mid-September, although the discounts had narrowed somewhat by the end of the quarter.

Steeper discounts for lower-Fe medium-grade fines

The steeper discounts for lower-Fe medium-grade fines also stemmed from the rising penalties from impurities such as silica and alumina as coke prices soared in September, which explained why the higher-Fe brands such as PBF, NHGF and BRBF saw relatively resilient premium levels.

Iron ore brands with high silica such as CSN’s IOC6 fines also saw discounts widening as end-users sought to reduce coke rates through the utilization of lower-silica ore. CSN sold a cargo of IOC6 fines via tender in mid-September at minus $30/dmt against the average of IODEX over the month after arrival, a sharp fall against an earlier cargo sold late August at minus $15.50/dmt against the average of IODEX over the month after arrival.

Vale sold less spot Carajas Fines, or IOCJ, in Q3, but more non-mainstream products. Vale’s spot sales of non-mainstream products, the bulk of which was high-silica fines, increased as early as Q2. This is in contrast with 2020, when its spot sales of non-mainstream products only surged in Q4.

Vale’s customers were advised that the quality of its high-silica fines, which are used to make Brazilian Blend Fines, or BRBF, by blending with IOCJ, deteriorated. As a result, a higher ratio of IOCJ was needed in the blend to maintain the quality of BRBF.

Meanwhile, production ramp-up in Vale’s Northern System, where IOCJ is produced, was heard to have been slower than expected. The two developments could be the drivers behind the tight supply of IOCJ and early surge in spot sales of high-silica fines. In addition to the runaway coking cost in China, the increased supply of high-silica fines into China also fueled the rise in silica penalties in Q3.

High silica penalties constrain high-grade supply

However, since September, Vale has reduced sales of high-silica fines. Firstly, the IODEX corrected sharply on the back of steel production curbs and power rationing in China. Meanwhile, high-silica iron ores were still heavily penalized due to the expensive coke prices. In addition, the freight rate from Brazil to China continued to rise, averaging $35.85/wmt in September. All these factors made selling high-silica fines alone uneconomical for Vale, market participants said.

As supply of high-silica ores has already decreased, the direction of silica penalties will largely hinge on the coke prices in the coming months, sources said, adding that changes in steel margins and the extent of sintering and steel production curbs in winter could also change mills’ tolerance levels of impurities in ore.

This report is part of the S&P Global Platts Metals Trade Review series, where we dig through datasets and digest some of the key trends in iron ore, alumina, steel and scrap, and metallurgical coal. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

The seaborne metallurgical coal market is entering the fourth quarter with prices at an all-time high amid global supply tightness and healthy spot demand.

However, while participants anticipate prices could correct to the downside in Q4 as China’s steel consumption slows and the possibility increases of higher supply across the grades, they generally expect prompt supply tightness to prevent a sharp fall in the near term.

This comes after benchmark premium low-volatile hard coking coal prices surged 100.3% quarter on quarter to $388.50/mt FOB Australia at the end of Q3, while PLV CFR China rose 95.4% over the same period to $603.75/mt.

Global supply tightness intensified in Q3, which was reflected in the decline in observed spot cargoes. S&P Global Platts observed 4.8 million mt of spot transactions for seaborne premium hard coking coal in Q3, down from 5.3 million mt in Q2 and down sharply from 6.2 million mt in Q3 2020.

Platts analysis of the laycans for the spot hard coking coal cargoes transacted shows a sharp fall in the observed volume for both Q3- and Q4-loading cargoes. Based on Platts data, a total 57 spot trades for Q3-loading cargoes were observed, down from 93 trades reported for Q3 2020. For Q4 loadings, only 22 cargoes have been reported to date, down 60% from 56 trades reported in 2020. The analysis considers observed spot transactions for PHCC and HCC, FOB Australia and CFR China, combined.

Market participants are highlighting the disequilibrium between demand and supply currently, saying supply has been unable to keep up with global end-user demand, especially outside of China. According to the World Steel Association, ex-China crude steel production rose 18.1% year on year over January-August, outpacing China’s growth of 5.3% over the same period.

‘Negative arbitrage’ does not mean no imports

The price arbitrage between domestic Chinese and seaborne PLV material fell to minus $33.55/mt at the end of September, with domestic material the cheaper option. However, some Chinese mills continued to book import cargoes amid continuing tightness in domestic availability. Platts observed a total 670,000 mt of PHCC and low vol HCC transactions concluded on a CFR China basis for September.

Market participants attribute the spot import demand amid a negative arbitrage to the higher cost of domestic freight for certain mills and specific quality-related preferences for blending needs. Some mills in China’s south can expect to pay Yuan 200-300/mt more for delivery than plants in the Tangshan region, for example. Some mills have also said they intend to continue importing material with low sulfur and low ash to help stabilize their blending mix.

The persistent supply tightness in China’s domestic coking coal market spurred an unprecedented rally in domestic coal prices in Q3. Platts assessed domestic coking coal prices up 82.7% quarter on quarter, rising from $307.24/mt to $561.45/mt, as local government safety inspections and environmental regulations crimped domestic production. Import prices were buoyed over the same period by robust end-user restocking demand, with seaborne PLV prices surging 95.4% quarter on quarter.

Power crunch adds to Q4 uncertainty

Sharply higher global prices in Q3 for energy-related commodities, coal included, could throw a wild card into the market for Q4. Participants anticipate the differential between hard coking coal and PCI/semisoft coking coal prices on an FOB Australia basis to narrow in the near term as higher thermal coal prices support lower end met coals.

China’s power rationing has also negatively affected steel production and demand for raw materials. According to Platts data, Hebei province is seeking to reduce its 2021 crude steel output by 21.7 million mt year on year to 228.07 million mt. Jiangsu, which has imposed power rationing on industrial users, has seen the biggest impact on crude steel output, with production down by at least 50,000 mt/day from mid-September. Jiangsu is China’s second-largest steelmaking province after Hebei.

China’s imports dip, diversify

With China’s unofficial import ban on Australian coal persisting, its total import volume fell 41.6% year on year to 30.7 million mt over January-August, China Customs data showed. However, increases were reported for several non-Australian origins, including the US, Canada and Russia, which rose 672%, 80% and 75%, respectively, year on year. Imports from Mongolia fell 21% year on year over January-August due to pandemic border restrictions.

A trend for diversifying supply sources also emerged, with Mozambique, Colombia and Indonesia sending 620,000 mt, 398,000 mt and 1.5 million mt respectively to date in 2021. “Despite the low tonnage, these cargoes could prevail and even grow in volume as long as the unofficial import ban remains,” an international trader said.

Coals from the US and Canada accounted for around 94% of total PHCC and low vol hard coking coal volumes, basis CFR China, over the first three quarters of 2021, according to Platts’ observed spot transaction data. In the PHCC segment, the most popular brands were reported to be Oak Grove, Blue Creek 7, Raven, Affinity and Rustic Ridge which, along with other brands, contributed to a total 2.35 million mt of spot trade observed for Q3 from the two countries.

In the Pulverized Coal Injection coal segment, Russia rose to become the top supplier to China. Platts observed a total spot trade volume of 1.06 million mt of Russian PCI over January-August, up 158% year on year. However, logistics disruptions in Q3 reduced the flow by 34.5% in Q3 from Q2, after Russia’s major Trans-Siberian Railway was halted when a bridge collapsed amid heavy rain and flooding in July, leading to supply disruptions.

The delivered volume of met coal is expected to remain low in Q4, based on Platts observed spot trade data. For Q3, Platts observed just 2.6 million mt of met coal trade to China that was expected to arrive in Q4. There is typically a two-month lead time between a trade and the physical cargo arriving in China.

“We believe the Q4 import volume will remain at a low level, barring any changes in China’s import regime,” an international trader said.