SEAISI ASEAN Steel Next Leap of Transformation

Transcription

1 SEAISI ASEAN Steel Next Leap of Transformation Change striking Raw Material Procurement Teams Eric Zhu June 25, Jakarta, Indonesia London Houston Moscow Singapore Dubai New York Beijing Kiev Tokyo Astana Shanghai Rio de Janeiro Washington DC Riga Calgary Brussels Cape Town Mexico City Berlin San Francisco Sydney Market Reporting Consulting Events

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3 Agenda About Argus Background to Presentation Steelmaking Raw Materials and Changes Ferrous Scrap Coking Coal Iron Ore Steel: Manufacturing and Construction s raw material

4 Global, Market-focused, Independent The world s leading PRA, with a team of 850 in 21 global offices 11,000 plus daily price assessments IOSCO compliant methodology Also offers Market intelligence for world commodities markets Bespoke consulting services and training. Conferences and forums Coverage includes: Energy Fertilizers Petrochemicals Global metals Copyright Argus Media Ltd. All rights reserved.

5 ASF: steel industry coverage from mine to mill Ferrous team 26 strong, over 6 offices. Publishing daily spot and forward price assessments, plus market intelligence for world commodities markets. IOSCO compliant methodology. Iron Ore Coking Coal Ferrous Scrap Steel Flagship: ICX 62% Fe 65%, 58% prices China portside prices Lump /Lump premium Flagship: FOB Aus PHCC Aus HCC, USEC HCC China domestic HCC Coke, PCI Flagship: 80:20 Turkey EU / Russian US domestic, export Metallics FSU, China Flagship: Asia ASEAN HRC China Rebar, HRC, WR Copyright Argus Media group All rights reserved.

6 Background to presentation Plenty happening in the world of steel. Raw Materials market disruption continuing. Underlying means of production is shifting again after a long Asia-led decade. Indexation embedding deeper throughout the chain but stopping at the mill (in) gates. Futures liquidity uncertain, though the base of products has never been greater.

7 Billion tonnes Global steel in rude health growing again Output resurrection driven by much improved margins But look who s back EAF share re-rise establishing roots BOF % EAF % Crude Steel LHS % Data: WSA

8 Electric Arc share bouncing back even in Asia % EAF Share (Asia) Data: WSA

9 Data: Argus Despite the odds: EAF margins hampered by scrap costs (f) 75 EAF Share Sep 2016 = 100 Sep 2016 Nov 2016 Jan Mar May Jul Sep Nov Jan Mar May Asia BOF Margin Asia EAF Margin Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May 2016 Fe Unit Cost

10 Jan-2012 Apr-2012 Jul-2012 Oct-2012 Jan-2013 Apr-2013 Jul-2013 Oct-2013 Jan-2014 Apr-2014 Jul-2014 Oct-2014 Jan-2015 Apr-2015 Jul-2015 Oct-2015 Jan-2016 Apr-2016 Jul-2016 Oct-2016 Jan- Apr- Jul- Oct- Jan- Apr- Million Tonnes Triple whammy puts brakes on CN steel exports o o o China s blue-skies policy has skimmed marginal steel out of production Much-improved domestic margins discourage exports As do the cumulative effect of tariffs i.e. ADD Monthly China Steel Exports Anticipated to be a blip, not systemic. Data: CISA

11 US$/t Steelmaking Raw Materials: Scrap Turkey still setting the tone for global scrap markets: although containerised correlations seem to be breaking down: Taiwan and India import good examples. US domestic has de-coupled from norms as Trump s tariffs boost steel tags. 385 Ferrous Scrap Flagship: 80:20 Turkey EU / Russian US domestic, export Metallics FSU, China Nov 01 Dec 01 Jan 01 Feb 01 Mar 01 Apr 01 May 01 Jun 80:20 CFR Turkey US Midwest Shred 80:20 CF Taiwan FAS LA Shred

12 Million tonnes Data: LME LME has a blockbuster ferrous product! And rebar. Turkish scrap futures volumes now over 25% of underlying physical market. Around 12 deep-sea vessel s worth of volume trading at LME per month. Now will a quintessentially spot market start floating trades or indexing? 1,600,000 1,400,000 1,200,000 1,000,000 Q-on-Q Futures Volume Growth 800, , , ,000 - Q Q Q3 Q Q1 Q2 Q3 Q4 Q1 Scrap Rebar

13 Impact on raw material purchasing teams Slow to emerge, but, as derivatives volumes grow relative to physical: Will a quintessentially spot market start floating trades? It would also ease some of the price volatility It could also allow longer-term relationships to be formalised, where buyers like vendors quality/service. The point of pack buying is either to beat the herd (be first to buy at the lowest price), or be with the herd (have the same input costs as peer competitors). But The same can be achieved by indexing. Trust in the index is a pre-requisite for this to happen. If it did in the world s biggest market, the results could spill over into origins and other delivery points.

14 Steelmaking Raw Materials: Coking Coal Correlations between premium coking coal, merchant coke, semi-soft and PCI remain poor: meaning grades need to be tracked individually. Coking Coal Flagship: FOB Aus PHCC Aus HCC, USEC HCC China domestic HCC Coke, PCI Nov 01 Dec FOB Australia 01 Jan 01 Feb 01 Mar 01 Apr 01 May 01 Jun PHCC PCI LV Semi-soft MV 65 Coke FOB China RHS

15 SGX Coking Coal s stunning growth unrepeated 1H Q-on-Q Futures Volumes % Q1 Q2 Q3 Q4 Q1 Q2 TD

16 US$/t Data: Argus If futures volume stability holds 2019 could be a better year, as more physical players join Regardless of whether that happens or not: 01 Jun Indexation is now established in the sector Not that this is much reducing volatility as price action has been driven by weather and Chinese policy. No matter if procuring by spot, or indices, prices have been volatile since the demise of the benchmark in. 01 Jul 01 Aug 01 Sep Argus PHCC FOB Australia 01 Oct 01 Nov 01 Dec 01 Jan 01 Feb 01 Mar 01 Apr 01 May 01 Jun

17 US$/t Benchmark stability sub-prime coking coal (PHCC) likely to follow suit i.e. end. What would replace it? Sub-prime has always been settled as a % of prime prices, whether PCI or semi-soft Dec Jan Feb Mar Apr May Jun 65CSR Coke FOB China PHCC LV MV HCC Semi-soft MV PCI LV Data: Argus

18 Impact on raw material purchasing teams: One index to rule them all? Or many used? A retrospective application of historic % s of the premium low-vol price is possible. But so is outright pricing. Buyers may well find themselves looking at many indices; rather than baskets. And PHCC does not seem to be in a final form state yet LV PHCC FOB Aus 65 CSR Coke FOB CN % MV HCC FOB Aus PCI LV FOB Aus % Q% Semi Soft MV FOB Aus % Dec Jan Feb Mar Apr May Jun Q%

19 US$/dmt Steelmaking Raw Materials: Iron Ore High grade diff to low grade at widest-ever levels: whilst the low grade spread has narrowed, high grade is pulling away. Persistent portside discount emerged in China over the last 6 months: inconsistent with a well functioning market. Iron Ore Flagship: ICX 62% Fe 65%, 58% prices China portside prices Lump /Lump premium Nov 01 Dec Argus ICX = Seaborne, PCX = Portside 01 Jan 01 Feb01 Mar 01 Apr 01 May 65 Premium to ICX 56.7 Discount to ICX 62 ICX LHS 62 PCX LHS 01 Jun % to ICX 62

20 Patient Zero: where the sector s disruption began It s a long-time ago, but the genesis of change was ore. Benchmark collapse sparked multi-year runaway derivative volumes growth 600 Iron Ore Futures and OTC Derivatives Contracts - Volume Cleared (million Q1 Q2 Q3 Q4 * SGX, CME Group, LCH.Clearnet, NASDAQ OMX Clearing and ICE

21 But change is once again rippling ore markets.. The growth period has since stalled and a new period is upon the market. 110% 90% 70% 50% 30% 10% -10% -30% -50% Y-on-Y Derivatives Volume Growth

22 Ore was the ferrous sector s big bang The after-effects of the huge disruption caused in the primary steelmaking ingredient have rippled for years But ore is not in it s end state and is transforming again: Portside pricing is exerting an effect on seaborne prices. China s futures exchanges are gearing up for global accessibility. Physical tonnages are moving onto new indices. Paper prices are flowing into Argus spot index price formation via widely used floating price spot sales. Inter-brand differentials are proving mobile again.

23 Impact on raw material purchasing teams: No longer one index to rule them all If you are used to using just one index: that is likely to change. Every major miner at Singapore s Iron Ore Week was talking about change in what contracts are linked to. Expect to see a drive towards increased transparency behind index price formation. Also: with brand differentials waxing and waning relative to indices as the underlying market changes, the pricing homogeneity of many years is breaking down. Demand no longer outstripping supply. Buyers are now more able than in previous years to be picky in exerting choice. Furnaces still need to be fed, but their diet is undoubtedly changing. Blenders note spot buyers de-prioritising China s favorite brands have seen widening discounts.

24 US$/dmt Steel: Manufacturing and Construction s Raw Material China still ruling the roost on rebar prices, despite a pull-back in export volumes. Remember the April export surge? FOB rebar became v. competitive from March But..HRC has decoupled significantly following the pick-up in Chinese mill margins. Steel Flagship: Asia ASEAN HRC China Rebar, HRC, WR HRC CFR ASEAN HRC FOB China Rebar FOB China Rebar CFR ASEAN Wire Rod FOB China

25 US$/dmt Follow the money.. It s easy to spot when Chinese export volumes for rebar will surge by following delivered vs FOB margin. But HRC now has many actors vying to supply the marginal tonne. Argus are publishing daily differentials from multiple origins so that ASEAN buyers get a clear reference for competitive sourcing Apr 02 May 09 May 16 May 23 May 30 May 06 Jun 13 Jun 20 Jun US$ premium to lowest price HRC CFR ASEAN LHS China Origin India Origin Japan Origin S. Korea Origin Taiwan Origin

26 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17 May-18 Tonnes Hedged So what next? Indexation will spread. Now that the practice is deeply embedded in raw materials, it will flow through to steel either as a natural consequence of offshoot of hedging. Or as a direct consequence of financial contracts for steel being used to offer forward. 350, , , , , ,000 50,000 - US HRC Futures CME Turkish Rebar LME

27 But? Where will it start? Where there is trust: in indices to be used And crucially, where there is seller-buyer trust or a desire to make longer term relationships. Exchange contracts? US HRC finally firing after a decade of availability: though it has low utility elsewhere in the world especially after US HRC decoupled from rest-of-world pricing. Turkish rebar a MENAT price setter, China a global reference. China FOB Rebar financial contract would be extremely useful. An Vietnam CFR HRC financial contract would be optimal, too. Why ASEAN? FOB China HRC as a contract will see frequent decoupling from regional markets which have alternate supply sources: China is no longer the lowest priced source of steel. Frequently put-out by India, Russia, Brazil. Vietnam will become a more important regional pricing point as capacity rises, with tonnes exceeding local demand using the FTA.

28 Impact on (steel) raw material purchasing teams: Indexation is coming. Because it must From a mill perspective alone, the on/off nature of buying is detrimental to efficiency: better to offer customers floating deals than build inventory or reduce output. From a buyer perspective, the show-downs when spot offer levels are perceived to be too high are a nuisance. Monthly negotiation between repeat parties is time consuming. Manufacturing likely to lead: the less price sensitive the end-product is to steel, the more sense it makes But Asian construction firms would benefit from indexation offers (origin regardless) for construction tenders. If an index can be entered into contracts, wherever the material comes from, margins will be intact.

29 Eric Zhu Asian Steel Phone: Office: Singapore Stay +Argusmediaplus Argus-media argusmediavideo Copyright notice All intellectual property rights in this presentation and the information herein are the exclusive property of Argus and and/or its licensors and may only be used under licence from Argus. Without limiting the foregoing, you will not copy or reproduce any part of its contents (including, but not limited to, single prices or any other individual items of data) in any form or for any purpose whatsoever without the prior written consent of Argus. Trademark notice ARGUS, the ARGUS logo, Argus publication titles, and Argus index names are trademarks of Argus Media Limited. For additional information, including details of our other trademarks, visit argusmedia.com/trademarks.