Chinese steel production still strong but where‟s the pricing power?  Macquarie Research,

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Commodities Comment
Chinese steel production still strong
but where‟s the pricing power?
 Chinese steel production continued to run at elevated levels over March.
In this article, we look at the steel data for 1Q11 and what the implications are
for utilisation rates at steel mills.

Latest news
 Most LME base metals prices finished the week with gains in trading on
Friday, although copper was broadly unchanged on the day. Tin rose 2.8% to
top $33,000/t and aluminium added 2.1%. Over the week as a whole, however,
most base metals prices fell, with lead losing 7.1%, although aluminium and tin
were broadly unchanged. All precious metals prices rose on Friday. Silver
spiked by 4.8% to $42.61/t.oz, for no fundamental reason, while gold gained
0.8% to $1,477/t.oz. Over the week as a whole, however, the picture was
mixed, with silver and gold up but PGMs down.
 China‟s GDP growth reached 9.7% in 1Q11. While this should be positive for
physical commodities demand, worries continue over the build up of inflationary
pressures and the tighter monetary policy implemented in recent months to meet
this threat has been weighing on the short-term commodities price outlook.
 US consumer confidence increased in April from the 16-month low marked in
March, with the University of Michigan‟s index rising to 69.6. Stronger confidence
is attributed to improving labour market conditions. The US economy has now
added jobs for six straight months and the unemployment rate has declined to a
two-year low. However, higher oil prices remain a worry and confidence levels
are still lower than before the recession; in the five years to December 2007
UoM‟s index averaged 89.
 Iron ore prices have risen over the last week, according to The Steel Index.
The reference level for 62% Fe fines increased by 2.1% WoW to $183.30/t.
 The market for manganese ore appears to be in meltdown. We noted reports
earlier this week that Mn ore fines for a shipment had been marked down by
40¢/dmtu CIF China and we now have news that medium-grade (43–44% Mn)
lump ore prices have been reduced by 70¢/dmtu (12%) to $5.30/dmtu CIF China.
Prices for low-grade carbonate ores (37–38% Mn) from South Africa have
fallen even further by 100¢/dmtu (17%) to $4.80/dmtu CIF China.
 In China, Mn ore port stocks continue to increase, climbing by 3% MoM and
110% YoY to 3.75mt (gross weight wet tonnes) at end March, and producer
stocks had risen substantially in 2010. However, what should be really
worrying for the industry is that today‟s record steel output in China is not
sufficient to support prices for Mn ore (~95% of all Mn units are ultimately used
in steelmaking). In this context, the latest price action suggests the industry
is carrying higher unreported stocks of Mn ore and alloys than previously
thought and that current mine supply is running at strong rates.
 We estimate that following these latest reductions prices are now cutting
into the top end of the cost curve. In South Africa, new entrants to the market
supplying low-grade carbonate ores largely rely on road transport for exports
through Durban and Richards Bay. The cost of trucking alone from the
Kalahari to these ports is works out to ~$2.70–2.80/dmtu today.