Bearish iron ore not a worry for Indian steel
Iron ore has had a tough year so far in 2017, what with its import price in China having fallen by 23% so far in the year. It may not get better. The market seems to be agreeing on a bearish outlook for the steel-making ingredient, as a growing supply of metal may come up against slowing production growth, especially of Chinese steel producers.
China’s manufacturing sector may have decelerated in the June quarter, according to a Bloomberg report, which also mentioned that the S&P Global Platts China Steel Sentiment Index remained lacklustre in June. If steel producers go slow then the hit will be felt by iron ore.
That is what Morgan Stanley’s analysts are expecting, who have lowered their third quarter price estimate for iron ore by 23% to $50/tonne and then raised it to $55/tonne in the fourth quarter, according to another Bloomberg report. Morgan Stanley’s 2017 iron ore forecast has been cut by 15% to $63/tonne but the outlook for 2018 and 2019 has been left unchanged at $58/tonne and $54/tonne, respectively. These revisions follow Citigroup’s cuts to its own forecasts.
The dull outlook for demand while supply remains robust is expected to see the iron ore surplus (excess of supply over demand) increase from an estimated 34 million tonnes (mt) in 2017 to 81 mt in 2018 and then zoom to 185 mt by 2021. This may, of course, change if the falling price of iron ore leads to companies cutting back on output. So far, that risk does not seem imminent. This week, BHP Billiton Plc said it will replace slowing growth at one mine by investing in another one.
If the outlook for iron ore is bearish, what does it mean for Indian companies? The first to feel the heat should be the iron ore companies, as it means prices will either be capped at current levels or may start feeling the pressure. Stand-alone iron ore mine NMDC Ltd is at risk and its share has declined, but it held on to prices in June. Vedanta Ltd’s iron ore business too may feel the pressure, but this is just one business among the many that it has.
Since iron ore prices globally act as a signal for steel prices, a fall there signals weaker steel prices. A recent research update by Kotak Institutional Equities says that domestic steel prices have fallen as have global prices, due to weak raw material prices. It expects steel company margins to get hit in the June quarter as a result. The bigger problem, of course, is weak domestic steel demand which is forcing companies to export their surplus. Exports will turn less profitable due to falling prices.
Is there a silver lining? Yes. Indian firms will benefit from the safety net of anti-dumping duties which will ensure domestic prices don’t fall beyond a certain level, says the Kotak note. With raw materials turning cheaper, margins may yet recover. To add to this, low investment in new projects will limit future supply while large firms have gained share over the smaller ones. Thus, while global steel companies may feel the pain from falling steel prices, Indian firms running large integrated steel operations may not wince much.
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