Commodities Comment:China Steel Survey Waiting for winter to pass
The January results of our proprietary steel sector survey, while mired in theusual seasonal slowdown, raise some interesting findings regarding thebehaviour of traders and inventory patterns that explain some of the currentweakness in steel and iron ore and potentially point to a recovery afterChinese New Year. Over January and February, when steel demand is at itslows for the year, steel output volumes are highly dependent on thewillingness of steel traders to build inventory ahead of the usual peak seasonthat starts in March. However, following tight credit conditions and years oflosses, there are fewer steel traders to participate in this year’s restock andwith sentiment so weak, there is also limited appetite to do so.
As a result, mills have struggled to find buyers, steel prices have softened andproduction my need to be cut back. Weaker conditions have flowed up to rawmaterials demand and it also appears that some liquidation of inventory at thedomestic mines in China is adding pressure to iron ore prices. While thingslook bad now, lower stock levels the other side of CNY may present anopportunity for price recovery.
Latest new
Anglo American announced the 4Q production results of their platinumsubsidiary, Amplats. The company mined 594 koz of platinum (inequivalent refined terms), 14% higher than 4Q 2013, which had beenaffected by a short-lived strike. Refined production (which is output thathas come out of the refineries and so reflects ore mined previously) was574 koz, down 17% YoY as in-process stocks were rebuilt by 20 koz incontrast to a more usual 4Q stock drawdown. Refined output of the otherPGMs showed a similar trend.
Glencore announced on Wednesday that it is considering mine closures at itsOptimum Coal subsidiary in South Africa, in response to falling thermal coalprices. The closures would reduce its overall South African production by atleast 5 million saleable tonnes per annum, with total Optimum output currently~10mtpa, split 50/50 between Eskom sales and export sales. It was notoutlined weather a ~5mtpa production cut would affect its exports anddomestic sales equally, though the presumption is that exports may bear thebrunt, given its statement that it will try to ensure continued supply of coal toEskom’s Hendrina Power Station. In a broader context, South Africa producesaround 260mtps of saleable thermal coal, of which Glencore’s combinedSouth African operations account for around 45mtpa. Thus, we don’t think thisrelatively small cut alone will have much impact on a dire thermal coalmarket, but it will be interesting to see whether any other mine shutdownsfollow leading up to the Japanese fiscal year contract negotiations.
After the export quotas were scrapped for rare earths from the beginning ofthis year (more details here), domestic media has reported that the remainingexport taxes would be removed on May 2. The positive impact on exportsthough could be limited, as the government may replace the export tax withan ad valorem resource tax, which was also introduced to coal at thebeginning of this year. Earlier reports suggested the ad valorem tax ratescould be set at 22% for light rare earths (from northern China), and 35% forionic rare earths (from southern China). More updates could come after aconference held by the MIIT with rare earth producers on January 28.
