The dynamics of Coal, Iron Ore and Steel Supply Chain: A volatile cocktail in the midst of a turbulent environment– What lies ahead?
The price of 62Fe CFR China has decreased by over 16% from 119.45 USD to 100.2 USD in the last 6 months while that of Platts PLV Fob Australia Coking Coal has decreased by around 25% from 358.25 USD to 270 USD over this same period. What might have caused this drop ?
The Iron Ore Chain is looking little rusty
On the demand side China seems to have caught the cold.
- China produces more than 50% of the world steel
- They imported around 1.18 billion tons of iron ore in 2023 which is close to 70% of the global iron ore import.
It is therefore the most important player in iron ore and basically drives the entire demand and price movement. Being the world’s second largest economy and with a huge push on development, manufacturing and exports, the steel finds in applications in several sectors. Below is a sector wise division of the steel consumption of China, courtesy Reuters.
As per the above distribution, the property sector consumes the highest amount of steel in China. This sector, along with the infrastructure sector, is the backbone of the Chinese economy and any disruption here would highly impact the steel consumption and the resultant iron ore demand.
And if you have been following this sector you might have come across the below news:
- The property sector been plagued by liquidity crunches and falling sales over the last year resulting in reduced demand for steel
- The crisis has been said to deepen further as the Chinese authorities have also signalled no bailout for the struggling real estate developers.
- As per China Real Estate Information Corp (CRIC), China’s top 100 developers posted total contracted sales of 185.7 billion yuan (US$25.8 billion) in February, a decline of more than 60 per cent year on year, and a fall of close to 21 per cent month on month.
How has this reduced demand impacted the steel production?
Let us check how this was reflected in our Hebei Hot Metal Production Index.
The Hebei province, an industrial hub of China produces around 20% of the total steel of China and we monitor all the important steel mills in that region as part of our Hebei Index. The index is therefore a good indicator of the steel production in Hebei in particular and China in general. Below is the trend of the Hebei Index for the last 14 months.
Our data shows that the index has been steadily decreasing from 92.16 to 72.03, resulting in a drop of around 22%. Although there could be many other factors, due to the weightage of property sector in steel consumption, the major factor for reduced demand of steel would have to be the property slump.
We also went one step further up the supply chain and monitored the inventory of iron ore at the major ports of Hebei province and saw that the stockpiles have been climbing up.
This means that steel mills are not procuring enough iron ore to produce steel due to reduced demand of finished steel products. This further confirms that the slump in demand of iron ore is real and there could be a prolonged lower-than-expected recovery of the steel mills output due to the property crisis.
The slump in property and infrastructure growth has been really bad and it is leading to a decrease in steel demand which in turn is leading to a decrease in iron ore demand resulting in a decrease in iron ore price.
What about the supply side?
However, it is also important to see the supply side of iron ore, if there is any oversupply of iron ore which could negatively impact the price. Our data shows that mining activity and stockpiles at the source ports has not increased.
In fact, the mining activity in the Brazil mines is low now due to seasonal factors and there has been a perennial logistics issue affecting supply from Saldanha Bay port. Other mining areas and stockpiles have been range bound. So the supply side has not been a major factor in the current price volatility.
The Hebei Hot Metal Production Trend is also an window to the overall Chinese Economy
China is a manufacturing and export-oriented country and was maintaining a very high economic growth rate in the past decade. Therefore, infrastructure development, real estate growth, machinery and white goods manufacture would be a very important pillars of the country’s economic development and would have high weightage while measuring the economic indicators such as PMI and PPIs.
And the key constituent in each of these sectors is steel. Therefore, a downturn in steel production due to reduced demand and consumption would also mean that the PMIs and PPIs would be less.
Infact, in Feb’24, the China Manufacturing Purchasing Managers’ Index (PMI) shrunk for the 5th month in a row signalling a contraction in the economy amidst slowdown in the construction and manufacturing sector. It was “52.6” 12 months back.
During this same period the China Producers Price Index had come down from 98.6 to 97.3. The Producer Price index has decreased for 17 months in a row signaling weak demand and overcapacity and highlighting the challenges in Chinese economy in the face of the slowdown.
This has been in trend with our weekly Hebei Hot Metal Index. Thus, the Hebei Hot Metal index does not only act as an independent validation tool to monitor the global and China ferrous supply chain activities but is it also a very good near real-time proxy of the Chinese Economy.
As a matter of fact, we have been highlighting our findings to our clients and in various forums and social media posts that the Chinese economy is going down based on our satellite data-based insights on the steel mills and stock piles. This is in contrary to several news sources and government reports that suggested that there was a growth momentum and even higher production numbers were reported. Whatever growth was there was perhaps momentary and not sustainable or a question may arise on the authenticity of the claims.
To conclude, the iron ore slump has largely been driven by the property crisis and the general negative sentiment in China. With the recent government statements of cleaning the real estate chaos it remains to be seen when the price can recover. To add to this there has also been discussion within the Chinese steel associations to reduce steel output due to lower-than-expected demand and weak margins at mills along with high inventories.
Importantly, those following our Hebei Index and stockpile data could have easily predicted the fall in iron ore prices and the direction of China economy despite the noise about growth and positive factors and indicators.
Coal Supply from Down Under is going down as well
In case of coking coal, the most important supplier is Australia and unlike iron ore, for coking coal the demand is more spread out with India, Japan, South Korea and Vietnam being the major importers. China also imports a substantial amount of coal but around 70% of that is from Russia and Mongolia. Hence for the price analysis of Platts PLV Australia, we would focus on the production trend of India, Japan, South Africa and Vietnam in addition to China.
Surprisingly, our Weekly Hot Metal Index for the 4 ex- China regions did not show a major decreasing trend. A decreasing production trend could have resulted in decreased demand of coking coal which could have resulted in a price drop assuming no oversupply.
Infact the increasing production trend should have had a positive impact on the price unless there was an oversupply of coal. If we look at the supply side, the mining index of the major mines in Australia has been a mix with some of the major mines showing a decreasing trend and some showing an increasing trend and the inventory at the source ports has also been mostly rangebound.
If we see the BMA Mining Index, which is a composite index formed by combining the mining activity of the BHP Mitsubishi Alliance mines such as Goonyella, Peak Down, Cavalridge, Blackwater, Saraji, Dunia with due weightage to their capacity, even that index is showing a downward trend. This means that there was no major oversupply of coal.
Why did the price drop then?
One point to consider is that the coal supply chain is a tight supply chain meaning there is always more demand than supply and any small incidents in mining output can trigger a price rally. We need to therefore see if there have been any specific incidents which impacted the price.
During the Sep-Oct 23 period, India was ramping up hot metal production but the supply of Australian coal was limited mainly due to maintenance issues and accidents in the preceding weeks of Aug-Sep 23 at major mines such as Goonyella, Peakdown. This limited supply rallied the price of coal to record levels in Sep-Oct 23. The rally was also aided by the safety inspections in the Chinese coal mines which led to closure of some of the mines which in turn forced the traders to import coal, particularly Australian coal. The price rally even forced some Indian producers to look for US high grade coking coal. This maintenance issues and incidents at the Australian mines as well as the high steel production in India were accurately captured by our indices at near real time thereby giving an early indication of price rise.
By November, as the Indian hot metal production started becoming stable and the Australian mines whose operations were impacted started generating output, the uncertainty and scarcity of coal supply reduced and the price slightly cooled off. This trend was also captured by our indices.
However, by mid-December the price again started marching upwards due to problems in the Red Sea that impacted the supply of coal from the United States and the market also factored in the seasonal trends of flood and cyclones in Australia. During this stage our satellite data-based insights on the coal stockpiles at the Indian mills showed an increasing trend indicating that steel mills were piling up reserves of coal fearing uncertainty.
By mid-Jan clarity increased on the conflict route and the hot metal production trends at the major regions had been stable and there were not major mine incidents. This reduced uncertainty led to a lower demand of spot coal and a general weakness in the market. Besides as mentioned above the Indian steel mills we sitting on huge stockpiles of coking coal and were waiting for the price to fall further and this led to further low demand of coal.
Most importantly, for March, our Hot Metal Index has been low for India, Japan and South Korea. For India, the production trend may be low till June when the general elections are over as major policy decisions on key steel consuming industries such as infrastructure will not happen during this time. There has already been news of very low demand for finished steel in India. On the supply side our data (shown above) show that the inventory has been steadily increasing in the Australian ports in March.
And this could explain the fall of the coal price till now. Rather this price range could be the standard for future as our insights and new sources highlight that the earlier rise in price were due to some major incidents. Well till another incident occurs…
To conclude some of the key factors that have been responsible for the coal price volatility have been:
- Maintenance issues in Australian mines
- Safety inspection at Chinese mines
- High steel production in regions such as India, Japan
- The Red Sea conflict hampering supply of US coal
- Indian mills sitting on stockpiles of coal and the upcoming general election
What next?
At Tathya.Earth, we are working towards building a near real time connected view of the ferrous supply chain. We have been monitoring the key hubs and nodes of the commodities supply chain from mining -> inventory -> production using alternative data sets such as satellite images. In due course, we would also progress further downstream and monitor assets such as the Hot Rolled mills. We have also expanded on the base metals side where we monitor commodities such as zinc and copper.
And our products are becoming more robust and accurate !
According to our CTO, Mr Naresh Palaiya, the launch of more number of satellites and the continued advancement in AI would be a great boon for the commodities industry.
“At Tathya, we are working on integrating various satellite datasets with AI to provide the visibility into the complex supply chain. Additionally, we are expanding to newer datasets and remote sensing techniques to provide more accurate insights and work towards building an AI enabled Supply chain monitoring and recommendation SaaS platform. The future looks exciting and we have a great product line up. We will keep everyone posted with our developments!” quoted Naresh.
Keep tracking our LinkedIn homepage and Blogs and mail/message us at hello@tathya.earth incase you are interested in similar near real time insights on the global ferrous supply chain or any other commodities.
