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Kallanish recently spoke to Jim Lennon, former Chairman of Commodities at Macquarie. We asked him for his view on the global steel market. Below is the interview in full.
Kallanish: Firstly, many thanks for agreeing to speak with us and answering a few questions which are of interest to our readers and event delegates. A lot happened for commodities in 2015 and now after the Chinese New Year holidays prices are rising again. We want to ask you about Chinese growth and where you see it, international trade, demand, costs, India and a lot more, but let’s start with a big broad question first.
Given Ikea's recent reference to the world now achieving "peak stuff," what are the implications for global material growth in the coming years? In particular, what will be the consequences for the met coal/iron ore sectors on the one hand, and for steel and stainless steel on the other?
Jim Lennon: I think that it is too soon to say we are reaching “peak stuff” globally since a significant part of Asia – especially India – and Africa still have standards of living well below that of the “developed” world. While commodities demand growth may slow in China, there is still some growth – less so for steel – while India is just embarking on the growth process that China began in the early 1990s. Between now and 2035, Africa has the largest rate of urbanisation of any region in the world.
Kallanish: Now, if we may, let us hear your views on China. How much capacity should China close to balance the market, and how much will it close in 2016?
Jim Lennon: Chinese over-capacity is of the order of 200 million tonnes/year and the government has committed to close 150m t/y. Very little is likely to close in 2016, probably less than 10mt. Chinese steel production could fall by 5% or so this year. This will continue to be a slow hard grind…
Kallanish: Which regions can still absorb more Chinese steel in 2016 and how do you see international trade, tariffs and restrictions?
Jim Lennon: Chinese exports are likely to fall slightly this year due to lack of global demand growth and anti-dumping duties imposed from the USA, Europe and some Asian countries. This is keeping the lid on export growth.
Kallanish: What is the comparative average cost for producing a tonne of steel in China and an average tonne of steel in the EU in 2015 and 2016? In which EU countries do you expect to see the biggest year-on-year changes in steel production?
Jim Lennon: Chinese costs are around $20-30/tonne lower than the EU. The difference is not great and related mainly to iron ore and some efficiencies from larger export-orientated Chinese coastal plants. I don’t have a strong view on which EU producers are most at risk – clearly the UK has suffered the most and most likely will continue to in 2016.
Kallanish: To what extent can India plug the steel demand gap left by China’s economic slowdown?
Jim Lennon: Chinese steel consumption fell by 40-45mt last year while Indian demand grew by 8mt. India is growing from a much lower base (around 88mt crude equivalent in 2015 versus China at just under 700mt). Indian growth should continue to be at around 7-9% per year while China will most likely stagnate. The next 10 years will see a substantially slower growth rate than the past 10-15 years, however.
Kallanish: If we take a look at the scrap market, how much longer will Turkish steelmakers be able to sustain their business if iron ore remains around $40-50/t and scrap prices not in correlation with iron ore?
Jim Lennon: Scrap prices have risen more or less in line with iron ore and the ratio between scrap and iron ore prices is not much out of line with historical norms. Turkey has a future!
Kallanish: One final question: where do you see price ranges for iron ore, scrap and met coal in 2016? What should we expect and what should we look out for as tell-tale signs for the rest of the year?
Jim Lennon: Iron ore is likely to trade in the $40-60/t range for the balance of the year, met coal in the $80-90/t range and scrap in the $160-200/t range. The market will be watching the success or otherwise of the proposed Chinese stimulus programme and also how growth develops in EU. The risks remain to the downside on our view regarding economic growth and steel demand and hence prices.
Kallanish: Many thanks Jim…
Jim Lennon is a part time consultant to Macquarie Bank and MD of Red Door Research. He is formerly Chairman of Commodities for Macquarie Bank where he spent 19 years. In total Jim has been analysing commodity cycles, supply and demand for over 30 years. Jim also appears regularly as a trainer with Kallanish Commodities, and his next presentation will be on the upcoming 3rd annual 2016 Kallanish Steel Making Raw Materials Masterclass in Zurich on 11th and 12th of April.
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