What is your expectation for iron ore regarding the second quarter after the disaster in Japan? Do you expect a decrease in iron demand from Japan? If this happens, how will it affect prices?
In Japan, blast furnace capacities are all back up and running after the earthquake; however, utilization rates are only tracking at around 70-75 percent. A lack of electricity availability - still around 10-20 percent below demand - is the key bottleneck, impacting downstream steel demand, especially in the auto components sector. The rate of recovery of electricity supplies leads to uncertainties, especially as the peak summer period fast approaches, since residential electricity demand is being satisfied ahead of manufacturing demand.
Meanwhile, iron ore shipments into Japan in Q1 this year were already down by about 20 percent due to various weather conditions affecting key suppliers, enforcing a destocking process on the Japanese mills. As a result, to date there has been virtually no impact on the seaborne iron ore markets, with very little pushback on cargo acceptances, although there have been a few instances of cargoes shifting to different ports.
After India decided to implement its export tax for iron ore, iron ore from Australia became more important. In your view, how will this decision by India affect the iron ore markets in Asia? Do you think this export tax will be long lasting?
Iron ore prices are trading above the seaborne plus China cost curve due to tight supplies. Even after India raised its export taxes, Indian marginal producer costs stand at around $140/mt CFR. This compares with current market prices of $190/mt CFR China, so every Indian producer is still able to make a profit. As for impact, I do not expect any impact on volumes at current prices as a result of the tax hike. I do expect Indian volumes to drop from mid-May to mid-September due to the seasonal monsoon rains. I expect India will reduce the export tax percentage from 20 percent once iron ore prices begin to fall back towards $140/mt CFR, to ensure continued government tax revenue generation. However, I do not expect China CFR iron ore prices to fall to this level any time before H2 2012.
Apart from this, what is your view of the current iron ore supply given that winter is over?
Chinese domestic concentrate supplies are picking up now that winter is over; likewise shipments from Canada and the CIS. In other markets, La Nina's impact on seasonal rains was a more important driver than the winter. The Australian summer cyclone season is nearing its close and weather conditions should begin to improve (ex-Australia shipments in Q1 2011 were down by around 13 million mt quarter on quarter). Ex-Brazil shipments should also begin to improve after uncharacteristically wet weather due to La Nina (shipments from Brazil in Q1 2011 were down around 15 million mt quarter on quarter).
India's monsoon season will begin from mid-May and will impact about five million mt per month, which will likely offset any increase from Australia and Brazil. Meanwhile, the end of Karnataka's export ban from April 20 comes so close to the monsoon season that I would expect most producers will not resume production until after the monsoon season ends sometime after mid-to-late September. We will see some new production tonnages coming into the market, primarily from Australia and Canada in H2 2011; however, relative to demand, overall supplies are likely to remain tight.
Australian suppliers have been delivering iron ore with quarterly contracts and are demanding monthly contracts. On the other hand, steel producers prefer annual contracts. What is your forecast about the revision of contracts? Do you predict any change?
I think the market has changed forever towards shorter-term pricing contracts, particularly given that the largest iron ore buyer of seaborne ore, i.e., China with 60-70 percent, sells almost 100 percent of its steel on monthly or even shorter contract terms - so margins are actually better matched with monthly or spot raw material prices.
Meanwhile, non-Chinese mills are gradually becoming accustomed to quarterly pricing for raw materials. İt remains to be seen if they will shift to short-term pricing structures or if the seaborne market will continue to operate a two-tiered pricing regime for Chinese and non-Chinese mills.
In your view, what are the chances of a softening in coking coal prices?
Coking coal prices should begin to soften once Queensland supplies recover towards full shipment rates. I do not expect Queensland shipments to fully recover before H2 2011.
Queensland shipments fell by about 13 million mt in Q1 2011, down 60-70 percent from normal shipment rates. Queensland accounts for around 55 percent of global seaborne coking coal supplies. Meanwhile, Canadian weather and strike action saw a further 2 million mt wiped from seaborne supplies during Q1 2011. In total, I estimate the global industry lost around 24 percent of shipments in Q1.
At some stage, the lack of coking coal in mills' stockpiles may impact steel production rates and therefore prices as well. I am sure mills hope any squeeze on supplies will be timed to coincide with the typical summer slowdown in steel demand.
China's coking coal import demand is also important - with its lower arbitrage price keeping Chinese mills from the seaborne market. It is difficult to tell how long their stockpiles will last.