China’s “steel scrap tsunami” that could have sent iron ore prices crashing has not progressed, but it is good news for Australia’s three biggest mining companies, which are due to file their financial reports next week.
BHP, Rio Tinto and Fortescue will report on three consecutive days, starting with BHP’s half-year results on February 20th, Rio Tinto’s full-year results on February 21st, and Fortescue’s half-year profits on February 22nd. do.
Iron ore, which has traded consistently above $100 a tonne over the past 12 months except for four days in May last year, accounts for most of BHP and Rio Tinto’s profits, and Fortescue’s only one. It will be the source.
Many analysts predict a decline in iron ore prices as construction activity slows in China and locally collected iron scrap replaces imported iron ore, leading to a decline in iron ore prices in Africa, particularly Guinea’s Simandou. Under threat from new mines.
Australia’s Westpac Bank, in its latest commodity research report, signaled a fall in iron ore prices, falling from $127 per tonne to $113 per tonne in the June quarter and rising to $91 per tonne by year-end. We expect it to fall to the dollar.
Morgan Stanley disagreed with Westpac’s opinion in a note published on the same day (February 9). He expects iron ore prices to return to $140 per tonne in the June quarter, with “potentially higher than expected.”
Morgan Stanley’s view on rising iron ore prices is based on research showing scrap usage in China’s steel industry is at its lowest in six years.
Declining iron ore scrap threat
“We believe this momentum will continue for the long term due to prolonged deflation and a squeeze in China’s steel profits,” Morgan Stanley said in a note headlined “Iron Ore Scrap Threat Diminishes.”
The bank said scrap has long been touted as one of the major disruptors for iron ore, but “China’s steel scrap tsunami remains elusive for now.”
Key points from Morgan Stanley’s scrap market analysis include:
- China’s steel scrap usage has been declining for four years.
- China is increasingly wary of its ability to rapidly increase scrap volumes;
- The main beneficiary of the scrap shortage is iron ore.
Of the two main methods of manufacturing steel, blast furnace and electric arc furnace, iron ore is the main raw material in blast furnace and scrap is mainly used in electric arc furnace.
“WorldSteel’s full-year forecast for steel and pig iron released last month reveals that 2023 will be another year in which iron ore and metallurgical coal dominate Chinese steel production,” Morgan Stanley said.
The failure of scrap to gain a larger share in the steelmaking business is said to be contrary to widely accepted expectations, whose origins predicted a significant increase in the availability of scrap in the future. This can be traced back to a 2017 McKinsey & Company study.
The Chinese government is also looking forward to growth in steel made from electric arc furnace scrap, and the latest forecast for the share of steel production included in the 14th Five-Year Plan to reach 15% is “again optimistic.” ,” the bank said.
Morgan Stanley said several factors are inhibiting increased use of scrap steel, including:
- The close relationship between steel mill profitability and scrap costs limits the economic attractiveness of scrap over iron ore.
- A widespread downturn in the real estate market has limited demand for long steel products such as girders and rebar;
- Untapped scrap collection and processing industry. There is less incentive to collect and salvage scrap from old buildings, infrastructure, vehicles and machinery, limiting the availability of scrap.
“The declining role of scrap in China’s steel mix could become a deeper problem as deflation and steel profits continue to stagnate,” Morgan Stanley said.
“This will keep iron ore demand well maintained.”