Robust steel demand paired with iron ore production problems pushes the market into deficit; new capacity is waiting in the wings
By Anton Löf, Magnus Ericsson & Olof Löf
The fundamentals of the steel market weakened considerably during the second half of 2018. The Organization for Economic Cooperation and Development (OECD), in its Steel Market Developments Q2 2019, points toward important headwinds that persist for the steel industry. These include a weakening global economic outlook, the increase in trade frictions, excess capacity, and a pickup in capacity investments.
World crude steel production grew to 1.808 billion metric tons (mt) in 2018, a new global all-time high. This is an increase of 4.5% over 2017, and the third consecutive year of growth.
Chinese crude steel production increased by 57 million mt in 2018, an increase of 6.6%, compared to an increase by 3% in 2017. At 928 million mt, China continues to be, by far, the largest producer. Output by the second-largest producer, India was 107 million mt of crude steel in 2018. In 2018, 51% of total world crude steel was produced in China, a slight increase from the year before.
According to the OECD, global steelmaking capacity remained nearly unchanged in 2018, after declines in capacity for both 2016 and 2017. The current global steelmaking capacity is calculated by the OECD to be 2.234 billion mt, a decrease of around 0.3% or a little more than 6 million mt from the revised figures of 2017.
The gap between capacity and production has further narrowed over 2018 as production has increased while capacity has decreased slightly. The OECD estimates the global capacity utilization (production of steel as percent of capacity) to be 81% up from 77.2% in 2017. The capacity utilization has not been at such a high level since 2008.
Since 2000, global steelmaking capacity has increased by 1.178 billion mt. Meanwhile, steel production over the same period, 2000-2018, rose from 848 million mt to 1,808 million mt. Hence, overcapacity has increased from 208 million mt in 2000 to 426 million mt in 2018. However, expressed as a utilization ratio, this is an improvement from 80% in 2000 to the previously discussed 81% in 2018. It is, however, only recently that the capacity utilization ratio has increased. In 2015, the utilization ratio was at its lowest during recent years and fell to 70%. It is also the year with the highest recorded capacity of 2.334 billion mt. Since then, more steel capacity has been shut down than what has been installed while at the same time, production of crude steel has increased.
However, at present, there are new projects adding 88 million mt of gross capacity scheduled to come on stream during the period, 2019-2022. In addition to this some 22 million mt of additional capacity increases are in planning stages for a possible startup during the same period. China on the other hand is planning to close down and restructure its steel industry, which should reduce capacity slowly within the country.
Global exports of finished and semi-finished steel products reached 457 million mt in 2018, down 1.3% from 463 million mt in 2017, the second year of consecutive decreases in trade of steel. China is the main exporter with 69 million mt or 15% of total exports down 8% from 75 million mt in 2017. EU exported a total of 147 million mt of which 119 was sold to other EU countries. Other major exporting countries are Japan, 36 million mt, Russia, 33 million mt, and South Korea, 30 million mt.
Global steel demand recovery from 2016 supported a rebound in steel prices from their lows in 2015 and early 2016. Steel prices, which has trended downward since 2011, rose sharply in 2016 and continued to increase during 2017 and into 2018. Since May 2018 when both flat and rebar steel prices reached a high, prices have declined steadily. The price levels of steel futures, as measured on NYMEX, also point toward falling steel prices in the short term.
Prices for the key steelmaking raw materials (iron ore, coking coal and scrap) declined between early 2011 and late 2015 beginning of 2016 contributing to lower steel production costs. Prices for the three main raw materials have since started to recover. The margin between raw materials costs and steel prices increased between 2013 and the second half of 2016 when, because of the sharp increase in the price of coking coal, the margins dropped sharply. Since then, margins have increased, but in 2018 margins fell but were still fairly high compared to the last 10 years.
Iron Ore Production
Global output of iron ore increased by a modest 1.1% to 2.241 billion mt in 2018. The increase is divided between several producing countries. Australia continues to grow faster than Brazil in absolute terms and added some 16 million mt to its output while Brazil added around 13 million mt over the year. In 2018, the former grew by 1.8%, to 901 million mt, and the latter by 2.9% to 448 million mt. Asian production, which reached a peak in 2007 at 647 million mt, has come down considerably since, mainly due to shrinking output in China and India. However, in 2016, Chinese output bottomed out around 100 million mt and production increased in both 2017 and 2018 when it reached some 146 million mt. The national Chinese production figures for unbeneficiated ores decreased by 40% to 793 million mt in 2018. In India, the downward trend has turned, with an increase in production since 2014. In 2018, production grew to 205 million mt, a 1.4% increase.
In Europe, including the CIS, production increased by 6.7% in 2018, up to 231 million mt. African production fell by 3.1% to 83 million mt in 2018, and output by the two major producing countries, South Africa and Mauritania, both declined, the former by 1.6% and the latter by 8.6%.
During the last decade, with the exceptional increase in production from Australia and the falling production in China, the share of iron ore being produced by developing countries has declined from top levels at 76% in 2007 to around 45% in 2018.
Iron Ore Trade
Global iron ore exports increased by 2.1% in 2018. World total iron ore exports have increased roughly 64% during the last 10 years and amounted to 1.584 billion mt in 2018 compared to 1.552 billion mt in 2017. Australia is by far the largest exporter of iron ore with a market share of 53%, an increase of one percentage point from last year. During 2018, Australia’s exports continued to increase, reaching 835 million mt, an increase of 2.8%. The second-largest exporter, Brazil has a market share of 25%, also an increase of one percentage point compared to last year. Brazilian exports grew by 2.7% in 2018 and reached 390 million mt.
South Africa exported 63 million mt of iron ore in 2018, which makes it the third-largest exporter. Ukraine at 58 million mt is the fourth largest followed by Canada with 47 million mt. Together, the five most important iron ore exporting countries accounted for 88% of total exports in 2018, up from 86% in 2017. India’s exports fell sharply in 2018 down by 35% reaching 19 million mt, the country will most probably move to become a net importer of iron ore as domestic steel production increases.
China alone accounts for 68% of total imports. During 2018, the country’s imports of iron ore decreased 1%. The latest decrease in Chinese iron ore yearly imports were in 2010. During 2018, China also increased its iron ore production, but import dependency is still some 88%, which is the same as last year’s figure.
In 2018, the seaborne iron ore trade increased by 1.9% to 1.527 billion mt. As in earlier years, the increase was entirely due to higher Chinese imports.
Iron Ore Pellets
Global pellet production in 2018 increased to 478 million mt, up 0.7% compared to 2017. Exports of pellets also grew in 2018 and reached 141 million mt, up 0.8%. The largest iron ore pellet exporters are in order: Brazil, Sweden, Ukraine, Canada and Russia.
The share of pellets in total iron ore production has declined since the late 1990s when it ranged between 26%-27%. The Mariana dam failure and the subsequent closure of the Samarco production units have underlined the sensitivity of pellet demand to world market conditions and prices. In 2017, the share of pellets to total iron ore produced was 22%, up from 21% the previous year.
Iron Ore Prices
Iron ore prices, 62% Fe CFR China, in 2018 were relatively stable and moved between $60/mt and $80/mt. Last year began with $74/mt and reached its peak already in January at USD $78/mt. A gradual decline followed that took the price to $63/mt in April from where a slow climb took off. By the end of the year, the price was $69/mt. The average price for 2018 was $69/mt, down 1.5% compared to 2017.
On January 25, 2019, the Brumadinho tailings dam operated by Vale collapsed killing at least 248 people. The catastrophe happened three years and two months after the Mariana dam disaster. The latter event has kept Samarco, who operated the dam, from production since. The latest disaster pulled an estimated 90 million mt of capacity from the market initially. As Vale’s operations reopened, that figure was reduced to an estimated 60 million mt, which effectively pushed up the price of iron ore. From January 2019, the price took off and reached a peak in early July at $123/mt. A sharp drop in the iron ore price ensued in August when it lost around 30% of its previous value. However, the price has since stabilized just over $90/mt. This is, compared to most forecasts from earlier years, a high price. The average price so far in 2019, up to mid-October, is $94/mt, an increase from last year’s average price of 36%.
The fundamentals and mechanics of the new spot market iron ore pricing system are after around 10 years widely accepted and working well. But the market is still evolving with, for example, more qualities being tracked. When the benchmark pricing model fell apart in 2009-2010, the dominating 62% Fe qualities exported from Australia became the globally recognized pricing basis. The 62% Fe price worked well as a basis for price setting of various qualities through the boom years as most steel companies were struggling to get enough iron ore to feed their blast furnaces. In recent years, both buyers and sellers have started to question the spot market pricing system. Sellers maintain that it underplays the value in use for higher grade ores as the vast majority of ores traded is of mid or low grade. Buyers question it as a majority of the quantities used to establish the 62% Fe price index is based on ore traded by only one producer. The global increase of iron ore production during the last decade consisted mainly of lower-quality ores with iron content less than 62% Fe. The average iron ore imported to China was, as an example, closer to 61% Fe in 2018. Lately there has been a push globally for improved steel productivity and China has further been attempting to reduce environmental problems and to diminish waste of energy. Both of these trends benefit higher grades of iron ore.
In 2018, global production of iron ore increased by 23 million mt. The largest production increases were recorded in Australia, Brazil, Ukraine and China. Naturally, most developments are under way in the two largest iron ore producing/exporting countries: Australia and Brazil. Further, with the high prices some African projects have attracted renewed interest. Some mines that were closed down have been considered for reopening.
In Brazil, Vale continues to develop the S11D mine located in their Northern System, which is to reach full capacity in 2020. The company also plans to increase production another 10 million mt/y within the Northern System. Currently, the project is 5% completed and is expected to be finalized by the second half of 2022. Also, in Brazil, Anglo American’s Minas-Rio mine is moving along with their stage 3 expansion that will take the mine to 26 million mt/y, currently the company is operating at roughly 90% of full capacity. The Germano mine, operated by Samarco, closed since the Mariana dam disaster in November 2015, is estimated to come on stream again in 2020 and reach its full capacity of 32 million mt/y after a ramp up period.
In Australia, there are several large-scale projects under way. FMG’s Iron Bridge Magnetite project is set to reach full capacity, 22 million mt/y, by mid-2022. Another FMG project, Eliwana is set to commence production in late 2020 and have a capacity of 30 million mt/y. Rio Tinto’s Koodaideri project is planned to start production in late 2021 and have a capacity of 43 million mt/y. Finally, BHP’s South Flank mine is planned to replace existing production from the Yandi mine, with production starting in 2021 at a capacity of 80 million mt/y.
In Africa, developments have taken place and projects are slowly revitalized. In the Republic of the Congo, for example, the Zanaga project, a joint venture between Zanaga Iron Ore and Glencore, is expected to produce 12 million mt/y in a first stage and raising output to 30 million mt/y in a second stage. In the DRC, the Sapro group exported its first tonnages in the first quarter of 2019. The company plans to produce 12 million mt/y for export, mainly to China. In Guinea, the Simandou block 1 and 2 have been prepared for an auction, the project was earlier owned by Rio Tinto. Also close by, on the border to Liberia are the Zogota and Nimba projects under development.
In Canada, Tacora Resource has restarted the Scully mine previously owned by Cliffs Natural Resources. The company announced its first delivery in August and capacity should reach 6 million mt/y before 2021. Another example of a closed down mine getting a new life is the Sydvaranger mine in northern Norway that is set to start production again sometime in 2020.
All in all, the scene seems to be set for a considerable increase in iron ore production in 2020-2021, if all projects move ahead as planned. This could indeed be the foundation for an oversupplied market.
Corporate concentration in the iron ore industry has remained fairly constant over the last couple of years. In 2018, the 10 largest companies controlled 62.8% of the production, a modest increase from 2017 (62.7%) and 2016 (62.4%). The earlier trend of decreasing concentration, due to swift production increases by many small- and medium-sized producers during the 2005-2008 period, was reversed in 2009. At that time, the major producers got their large expansion programs up and running. Since then, industry concentration has increased slowly but steadily. The “Big 3” iron ore mining companies (Vale, Rio Tinto and BHP) have also steadily increased their control over total world iron ore production. In 2018, the companies’ combined control reached 42.4% up from 41.3% in 2017.
Vale, the Brazilian giant mining company, remains the world’s largest iron ore producer, with 385 million mt of iron ore production in 2018, up from 367 million mt in 2017, a new all-time high. After a slight decrease in production in 2016, because of the Mariana dam failure, new production capacity at the S11D project in Carajas has come on stream and production has increased in both 2017 and 2018. All of Vale’s mines are located in Brazil, and its market share rose from 16.5% in 2017 to 17.2% in 2018, down from the peak of 18.8% in 2007.
Rio Tinto has been the second-largest producer since 2016, when it overtook BHP and regained its traditional second rank. Rio produced 291 million mt in 2018 up from 283 million mt in 2017. Rio Tinto has a market share of 13%, a slight increase since 2017. Rio Tinto
has most of its mines in the Pilbara region in Australia, and in addition controls the Iron Ore Co. of Canada with mines in Labrador.
BHP managed to increase its market share from 12.1% to 12.2% as production reached 274 million mt in 2018. Except for the Samarco joint venture in Brazil together with Vale (50/50), which has not been producing since 2015, all of BHP’s mines are in Western Australia.
Hancock Prospecting, the privately owned emerging Australian iron ore giant, controlled by Gina Rinehart, has grown rapidly in the past two years. The company, which owns the Hope Downs mine in Western Australia together with Rio Tinto, has gradually started up its Roy Hill mine. Production began in 2016 and has catapulted Hancock into the fifth position among the world’s largest iron ore miners. In December 2018, the company further acquired Australian miner Atlas Iron to further boost its iron ore production.
However, the measurement of corporate control at the production stage underestimates the real concentration of the iron ore sector, especially by the three largest companies. Large portions of total output do not enter the market, but are produced at captive mines or mines that have a protected or restricted market. The corporate concentration, if measured by the share of the major companies in global seaborne trade, is considerably higher. Vale alone controls 25.2% of the total world market for seaborne iron ore trade, and the three largest companies in 2018 controlled 60.1%, a decrease from 63.4% in 2017.
During 2019, a number of smaller producers have taken the opportunities that the higher iron ore price during the year has presented and restarted production from earlier closed mines. Examples include Kaunis Iron and Tacora Resources. Also, China has increased its locally produced iron ore. This points toward a push downward of the corporate concentration. However, the majors have also increased their production. Most probably, corporate concentration will only change marginally in the next few years. How much will depend mostly on the speed of expansion by the large Australian producers as well as Vales ability to restore their production and following up the ramp up of ongoing projects.
Global economic growth in 2018 reached 3.6%, according to the IMF October World Economic Outlook update. This is down from 3.8% in 2017 and is forecast to drop to 3% in 2019. The 2019 forecast is a 0.3 percentage point downgrade from the previous report from the IMF and shows the problems facing the global economy at this point in time. Or as the IMF put it, “the global economy is in a synchronized slowdown.” The subdued growth is a consequence of increased trade barriers, elevated uncertainty around global trade and geopolitics, low productivity growth and aging populations. From the point of view of iron ore, it is interesting to note that the IMF expects non-commodity exporting countries to outperform the commodity exporting countries, especially among developing countries. Downside risks to the IMFs forecast are further “elevated.” Negative signals from trade barriers, geopolitical tensions including Brexit could easily hamper growth, confidence and investments. According to IMF, policies should focus on undoing trade barriers and restore confidence in the global economy. While monetary easing has supported growth, it is also important to acknowledge the risk associated with monetary easing and measures should be taken to ensure that financial risks are limited.
During 2018, world crude steel production increased by 4.5% or 78 million mt. For the first nine months of 2019, global steel growth was 4.4% compared to the same period last year. This pointed toward a continued industry growth. China alone accounts for more than half of the crude steel production globally and the country’s production of crude steel grew by 9.1% in the first nine months of 2019, compared to the same period 2018. However, Chinese production will most likely taper off during the winter months with governmental restrictions on emissions and total growth over the year is likely to be lower than the current figure.
The World Steel Association’s Short Range Outlook October 2019 for world steel use, anticipates an increase in world steel demand by 3.9% in 2019, followed by an increase of 1.7% in 2020, compared to a growth of 4.6% in 2018. China’s steel demand, which represents 49% of total world demand in 2018, is expected to increase 7.8% in 2019 and 1.0% in 2020. In comparison to the World Steel Association’s earlier forecast in October 2018, global growth in 2019 was forecasted at 1.4%.
China is moving toward lower GDP growth as well as a society where consumption rather than investments is the driving force of economic activities. This should negatively impact the growth potential for steel demand. With lower steel growth, the scrap ratio of steel burden will also increase as more and more steel becomes available for recycling. This will limit demand growth for virgin units of iron ore.
Globally, the growth in production of pig iron increased by 2.3% or 28.4 million mt and direct reduced iron (DRI) increased by 13% or 11 million mt in 2018. That would generate an additional demand of roughly 61 million mt of iron ore globally. Global iron ore production in 2018 increased by 23 million mt, less than demand. The iron ore market was thus fairly balanced during 2018 with stable prices. But with the January Brumadinho dam disaster, the iron ore market came into a clear deficit and iron ore prices have been high so far during 2019.
For the first nine months of 2019, six major companies reported quarterly figures produced 774 million mt. This represents a decline of 6.3% compared to the same period last year. Vale shows the largest decline, down 21%, but it is interesting to note that all Big 3 shows reduced production. Further, Brazilian exports for the period January-September 2019 decreased with 14% compared to the same period in 2018. Chinese imports during the period January-August declined by 3.3% compared to the same period in 2018. Chinese imports thus totaled 686 million mt for the first 8 months, or 1,029 million mt on an annualized rate.
The spot price for 62% Fe fines delivered in China will probably remain relatively high for the rest of 2019, with the caveat that iron ore demand from China may drop during the winter months causing a restocking at Chinese ports. However, looking at 2020 growth in steel, as discussed earlier, is forecast to be lower than 2019. Further, as pointed out, scrap may take a larger share of the burden than previously. This, in combination with the completion of Vale’s S11D and the gradual increase of production and export from Vale as well as the other big Australian producers producing at capacity peak, Rio Tinto estimates an increase in production by roughly 12% for fiscal year 2020 and BHP forecasts an increase of around 2% for 2019, the iron ore market is set for a readjustment.
Iron ore production capacity will probably increase faster than iron ore demand, which should put the spot iron ore 62% Fe price under pressure, a consensus view is a price of around $70/mt for 2020.
The spread of prices between the low, medium and high-quality iron ores can, however, be expected to remain wide. There seems to be a glut of low-quality ores and a deficit of high-quality iron ore products, especially pellets. If this situation continues a reduction of production by certain low-quality miners might take place. Producers of high-quality ores might instead increase their production.
Anton Löf and Olof Löf are with RMG Consulting, an independent consultancy firm based in Stockholm, Sweden.
www.rmgconsulting.org. Magnus Ericsson is at Luleå University of Technology. For further details, contact Anton Löf at