Strong demand for iron ore in China and more expensive CO2 quotas are likely to drive up production costs for German steelmakers, says Peter Fertig, senior analyst at MBI Martin Brückner Infosource. However, steel demand in China and rising demand for finished products in Germany should support hot rolled metal prices.
MBI Infosource predicts an average hot rolled coil price of € 441 /t ($ 519) in 2020 and € 459 /t in 2021, for rebar € 457 /t in 2020 and € 488 /t in 2021, and also for wire rod € 498 /t in 2020 and € 550 /t in 2021.
The Covid-19 pandemic has put more pressure on steel prices than on production costs. Although the global economy has been hit by the crisis, China has recovered quickly, which has boosted the demand for marine iron ore since May and thus the prices of raw materials for steel production. On the other hand, flat steel prices in Europe remained low until they stabilized in the summer and recovered in August.
“When China goes through a crisis, the government always uses the same solution – massive investments in infrastructure,” Fertig said at the MBI Stahl Tag conference in Frankfurt. The subsequent growth in steel demand in China was largely met by imports from other countries, which supported world prices.
Steel production in China is expected to decline in the second half of 2020, but then rise in 2021 and remain above 2020 levels. While domestic iron ore production in China will also rise next year, this will not be enough to meet demand, which means that iron ore imports from China should also rise next year, Fertig said. On the supply side, problems in Brazil still need to be addressed and a possible second wave of Covid-19 could cause disruptions. This will undoubtedly lead to increased costs for blast furnace steel producers in Germany and Europe.
China’s steel production is expected to grow 5.4% year on year to 1.046 billion tonnes and 6.7% year on year in 2021 to 1.117 billion tonnes. Iron ore production should grow by 0.8% to 865.3 million tons and by 12.1% to 970.1 million tons, respectively, while imports of iron ore should increase by 11.8% to 1.197 billion tons and by 10.4 % to 1.321 billion tons, respectively.
Sentiment in the German auto market has improved in recent months, which should support steel prices. Earlier this year, the German Supplier Industry Working Group’s ArGeZ index fell to near its 2009 low, but has since climbed above 10 for the first time since 2008.
Eurozone’s M1 money supply, meanwhile, rose to nearly 55, which bodes well for German HRC prices, with which it is closely tied. “Expansive monetary policy supports further industrial recovery,” commented Fertig. “It’s still in negative territory, but the direction is up.”
However, thanks to the EU climate policy, CO2 emission quotas could double in the coming years to 60 euros per tonne, which will lead to higher electricity prices. If electricity and scrap metal become more expensive, it will also increase the cost of making chipboard steel, which will be passed on to customers, Fertig concluded.