[STEEL ] www.platts.com STEEL RAW MATERIALS MONTHLY www.twitter.com/PlattsSBBSteel Issue 17 / July 2014 Hebei mills and miners doing it tough Contents Iron Ore Market Focus 3 Hebei province, the present-day cradle of rise in the rest of the country, according to the steelmaking in China accounting for one- National Bureau of Statistics. Iron Ore Data 5 third of the country's total capacity, is By last May, however, Hebei’s crude steel Metallurgical Coal Market Focus 6 uncomfortable. All heavy industries it hosts, production had climbed to 16.4 million mt, Metallurgical Coal Data 8 but especially steel, have been under intense giving it a 23.2% share of the country’s total scrutiny since last October when China’s new output, which was down 3% on the previous Scrap Market Focus 9 central government led by President Xi Jinping year. Meanwhile, output elsewhere across Alloys Market Focus 10 and Premier Li Keqiang publicly resolved to China grew by an average 2.6%, Platts notes. News 11 tackle overcapacity as part of a major effort Whether steel production is slowing Special Report 19 to improve northern China’s air quality. because companies in the sector have been In June, Platts spent a week travelling in struggling to make decent profits or whether Project Focus 22 Beijing and touring Hebei, talking with Beijing’s environmental clampdown has started Global Trade Highlights 23 government officials, steel producers, iron ore to have some impact is unclear. But anecdotal Steel Raw Materials Monthly Averages 24 miners and traders, to take the pulse of the evidence points to the former reason, with province ten months after Beijing made its some small- and privately-owned steel mills in announcement on overcapacity. Here are Hebei understood to be considering exiting the Editorial some of the key take-aways. steel business because of the weak market. Hebei’s contribution to China’s total steel One general manager of a 1 million mt/year Indian steel needs more help output has fallen, while its growth rate has steel mill in Qian’An city, Hebei, said the works There was a cautious welcome from slipped below the national average. In September was preparing to close after operating for a India’s steelmakers towards the first 2013, prior to the country’s chief executive decade. “The halcyon days for steel are long budget handed down by the new Modi announcing the crackdown, Hebei produced 15.7 gone and I see little point hanging in here,” he government earlier this month, as million mt of crude steel, accounting for 23.9% of conceded. “The struggle is only going to get funds were set aside for new roads, total output. Year-on-year growth in output for the worse as Beijing no longer favors the steel rail and port. There was also a month reached 12.9% compared with an 11% industry. Competition between mills over price reduction in the duty for coking coal and other aspects will only become more exports from 6% to 4.5%, which as a China's major steelmaking aggressive, helping no one,” he warned. major importer of the steelmaking raw provinces (million mt) A second industry source said the owner of material will be well-received. But the two small steel mills in Tangshan had recently government will need to do a lot more Jan-May y-o-y Contribution to sold out, with one of them – a 900,000 metric if the country is ever to reach its 300 2014 growth total output tons/year narrow strip plant – selling for Yuan 3 million mt/year steel production billion ($478 million). “The price was very good, capacity target. Hebei 82.95 -3.76% 24.20% and the owner was lucky to have the option to Jiangsu 39.39 8.20% 11.50% leave the market intact,” Platts was told. But Some within the industry believe it will Liaoning 26.85 9.18% 7.84% others have been less fortunate. Many local cost $200 billion to treble the country’s Shandong 26.56 0.20% 7.75% steel mills remain entangled in a web of debt as steel production, which if accurate Shanxi 18.49 -0.04% 5.40% they either owe or are owed money. In some constitutes a major long-term Other 148.28 cases, the option to simply walk away is not investment. Preventing steel companies Total 342.52 2.71% available. Sources said some were prevented from accessing captive iron ore supplies Source: NBS from doing so because of the complexity of multi- in states such as Odisha can’t be (continued on page 2) helping. Tata Steel has been successful in India because of high levels of self- Key price assessment monthly averages, June 2014 sufficiency. But it and fellow steelmaker JSW Steel are impacted by the mining Unit Average change % change bans, which could be a reason why the Platts IODEX Iron ore fines 62% Fe CFR North China $/dmt 92.67 -8.13 -8.07 pair could import more than 800,000 mt Platts Coking Coal, Premium low-vol FOB Australia $/mt 111.19 -1.19 -1.06 of iron ore in July alone, according to Platts Ferrous Scrap HMS CFR Turkey $/mt 370.74 -2.74 -0.73 Platts shipping data. Paying a premium to import material cannot be helping the TSI Iron Ore Fines 62% Fe $/dmt 92.74 -7.82 -7.78 companies’ bottom lines and will not be Chinese imports (CFR North China port) sustainable in the longer-term. This is something the new Modi administration TSI Coking Coal, Premium hard, $/mt 115.76 -1.26 -1.08 Australian exports (FOB port) will need to address. TSI Ferrous Scrap HMS 1&2 80:20, $/mt 371.33 -3.27 -0.87 — Paul Bartholomew Turkish imports (CFR port) STEEL RAW MATERIALS MONTHLY ISSUE 17 / JULY 2014 Hebei mills and miners doing it tough “We can’t afford to lower prices by ...from page 1 more than another Yuan 10-20/dmt,” a Hebei-based miner explained. “It wouldn’t party financing and the reluctance of local previously, and they also need to be more help much in any case against imported authorities to allow key sources of provincial flexible about loan repayments,” he added. iron ore prices, so we have opted to stock and municipal tax revenues to disappear. “Mills and banks are sinking in the up our concentrate and wait for a better same boat so they have to help each other market,” he told Platts. Banks and mills stuck with each other to survive,” the Tangshan source said. Imported iron ore prices have since Banks have also become more circumspect Hebei is a major iron ore production recovered by around $5/mt in late June and about issuing short- or medium-term loans region and like the province’s steelmakers, into early July after sitting at around $90/ to steel mills and when granting letters iron ore producers are also doing it tough right dmt for much of May and June. Rather than of credit are raising the required deposit now, squeezed by a languishing steel market raising their offers to compete with lower ratio to 30% of the LC value from 15-20% and mountains of imported iron ore sitting at import prices, domestic miners took the previously. Yet similar to some mills, it is ports. Domestic mines producing magnetite opportunity to destock their inventories. not easy for banks and other financiers to are saddled with higher concentrating costs in “It has been rare for us to keep more extricate themselves from the steel sector. comparison with imported hematite. than 200,000 mt of concentrate in stock, “All Chinese banks, especially those Domestic iron ore suppliers lost their though this was the case for most of the privately-owned ones, such as Minsheng battle against cheaper imported iron ore at first half of this year, so our core task now Bank, are highly exposed to the steel ports earlier this year when prices of is to destock rather than chase margins,” industry, in everything from production to domestic concentrate (typically grading an official from a large iron ore miner in steel and iron ore trading,” a Tangshan- around 66% Fe) delivered to mills in Tangshan Hebei said. Yet the suffering of China’s based market source said. “So for the fell to the break-even point for most Chinese domestic miners – especially those in banks to turn off the tap now would be miners of Yuan 850/dry mt ($138/dmt). Yet Hebei, the country’s largest iron ore mining suicidal. They have to keep pumping in by the end of June very few miners had cut province – has not affected output much, funds, albeit at a slower pace than production in any significant way. market sources confirmed. This is borne out by the country’s iron China’s key iron ore production regions ore output statistics, which showed that last September Hebei’s output reached 56.3 million mt, or 41.2% of the country’s total. By May however, the province produced 47.5 million mt of iron ore, or 36% of the country’s total, a slide that was in proportion Hebei province with the province’s lower steel output. Looking at the second half of 2014, China’s domestic iron ore miners will CHINA probably try to hang on and hope overseas suppliers do not initiate a long pricing battle. They will also increasingly look to central and local government authorities to relieve them of the burden of numerous taxes that can account for around 25% of production costs and add as much as RMB 200/mt to their sales price.