Bulk Buys: How optimistic can we be on China’s latest steel...

Bulk Buys: How optimistic can we be on China’s latest steel numbers?

• China’s steel output rebounded in May, but it may be hard to remain optimistic
• Around 1000 jobs to go as MinRes announces plans to shut marginal Yilgarn iron ore operations in WA
• Jameson runs after Canadian coking coal play issues shares

Iron ore stocks have been real money spinners in recent times, with BHP (ASX:BHP), Rio Tinto (ASX:RIO) and Fortescue (ASX:FMG) pumping out some of their strongest dividends in the past five years in response to enduring high prices for the steelmaking commodity.

But those good times have been tempered with some anxiety, a state which the industry, so dependent on the demand side on China’s flailing real estate industry, is no stranger to.
Iron ore rose surprisingly despite questions around the state of the Chinese economy to over US$140/t late last year.

It has since fallen back to ~US$107/t, levels which remain highly profitable for low cost Aussie majors, but a little tenuous for smaller marginal producers.

Sentiment around prices often swings on steel production in China, which buys around 80% of the world’s seaborne iron ore and produces almost 60% of its crude steel.

New figures out of the Middle Kingdom show production is down 1.4% from January to May.
But there could be a little to smile about, with output up 2.7% in May, the first time it has risen on a year on year basis since February.

What’s behind this?

Commonwealth Bank’s mining doyen Vivek Dhar said in a note yesterday a turnaround in Chinese steel mill margins, suddenly positive as steel prices consolidated and input prices for iron ore and coal fell, prompted a sharp lift in output in May.

“The rise in steel output last month is broadly consistent with steel mill margins in China turning positive in late April and early May. Given the significant negative steel mill margins that were sustained from late September 2023, it’s not too surprising to see steel mills respond swiftly to a brief period of positive margins,” he said.

But a reversion to negative territory for steel margins make it “hard to remain optimistic” that June’s numbers will improve on 2023’s, a year in which China surprisingly lifted steel output, albeit slightly, after two straight years of declines from 2020’s record high.

According to MySteel rebar profits which rose to US$10.50/t in April reversed to a US$1.80/t loss in May.

While crude steel output lifted in May, National Bureau of Statistics figures show rebar production was down 8.9% year on year, while YTD rebar production has slowed 13%.

Reinforced bar is strongly associated with end markets in infrastructure and property construction, with new home builds already known to be well down in 2024.

Dhar said waning enthusiasm around property stimulus had hurt steel prices.
“The government was willing to lend RMB 300 billion to purchase unsold properties, with hopes that it would be enough to generate total funding of RMB 500 billion, as Chinese commercial banks step in with additional loans,” he said.

“There are credible concerns that China’s total funding objective undershoots what is truly required (~RMB 2.5 trillion to ~RMB 7 trillion) to absorb excess housing stock in China. China’s property sector accounts for ~30% of China’s steel demand.”

Dhar still thinks steel demand and output in China will track sideways across the year, underpinning a business as usual outlook for iron ore prices that would see them remain between US$100-110/t in the second half of 2024.

“If infrastructure investment fails to pick up, the risk to our outlook is a fall in China’s steel production and iron ore prices finding support below $US100/t (62% Fe, CFR China) in coming months,” he said.

“It’s worth noting that while policy may be focusing for now on stabilising the property sector, it will eventually turn its attention to economic targets set for 2024.

“This means that negative outcomes for China’s property and infrastructure sectors in coming months boosts the likelihood of more additional centrally administered infrastructure investment towards the back end of the year.”

MinRes shuts iron ore hub

Speaking of those marginal iron ore players, Mineral Resources (ASX:MIN) dealt some tough late breaking news to the market by declaring its Yilgarn Hub in WA’s Goldfields would be closed by the end of 2024.
The project, which includes the historic Koolyanobbing mine near Southern Cross once operated by BHP, is not financially viable, according to MinRes, which has limited mine life across a network of five operations across 220km.
A transition to care and maintenance will begin in early 2025, several years after MinRes purchased the operations of the departing Cleveland Cliffs in a WA Government brokered process that included now expired royalty relief.
The then Mark McGowan-led Labor Government had engineered the sale to keep hundreds of wharfies employed at the southern WA port of Esperance after the US steelmaker announced its intention to close the site at a time when discounts for its lower grade ore made Koolyanobbing unprofitable.
MinRes had been barred from developing an environmentally contentious deposit on the nearby Helena Aurora Range, with Koolyanobbing providing the scale to keep its Carina operations running.
MinRes, which recently announced the start of shipments from the $3 billion, 35Mtpa Onslow Iron project in the West Pilbara and also runs the lower cost Utah Point hub exporting from Port Hedland, said 1000 employees would be impacted by the decision.
There are around 800 vacancies in the lithium, iron ore miner and mining services company’s business, it said.
“This prudent but difficult decision was not taken lightly and follows years of investment to extend the life of our operations in the Yilgarn,” MinRes boss Chris Ellison said.
“With our investment across Western Australia, we have almost 800 vacancies and will redeploy as many of our people as possible to other MinRes operations, including to our low-cost, long-life Onslow Iron project.
“MinRes has operated in the region since our maiden shipment from Carina in 2011. In 2018, with the support of the WA Government, we stepped in to save hundreds of Western Australian jobs at Koolyanobbing that were set to be lost with the departure of Cliffs.
“By the end of this year, we will have operated Koolyanobbing for six and a half years, exported almost 45 million tonnes via the Port of Esperance and spent $4.2 billion running our Yilgarn operation, exceeding our commitments.
“I want to thank everyone whose hard work and dedication over the past 13 years made this challenging operation a great success.”
MinRes reported YTD costs of AUD$107/wmt at Yilgarn in their March quarter operating results in April, at the top end of their guidance of $97-107/wmt. The closure comes after MinRes had gone quiet on a plan to develop a magnetite hub to produce high grade ore in the region.
To conserve costs had reduced production from export capacity levels of around 11MTpa to ~8Mtpa in recent years.