European steel shows the strain :Macquarie Research,

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European steel shows the strain
Feature article
 We review the release of August global steel production data by worldsteel.
August showed the lowest annualised output in 2011 thus far, with Europe
slowing even more than would be expected by seasonal trends as low
steelmaker margins and macroeconomic concerns started to bite. Even with
this, global output remains almost 10% up YoY.
Latest news
 Base metals struggled to stop the downward price trend in Tuesday’s LME
trading, as the IMF unsurprisingly cut global growth projections for both 2011
and 2012 to 4% (from 4.3% and 4.5% previously). Moreover, US housing
starts were softer than expected, falling 5% MoM. Copper and zinc closed at
yet another 2011 low, at $8,280/t and $2,059/t respectively.
 LME lead stocks increased by 15,250t to a total of 345,425t on Monday,
following the backwardation that has emerged at the front end of the lead
price forward curve. Most of the new metal was delivered in warehouses in
Port Klang, Malaysia, and more may follow. Meanwhile, cancellations of tin
stocks remain high at 3,320t, equal to 16% of total LME stocks, which we
think is due in part at least to the ongoing deficit in the tin market.
 Rio Tinto held an investor seminar in London and New York on Tuesday,
focusing on its Copper and Energy divisions. It was noted that order
books were full, however customer sentiment and physical market
conditions were softer.
 In terms of growth plans, total iron ore production growth of ~50% is
targeted over the five years to 2015 (though we assume a slightly more
conservative profile). Copper production growth of ~8% CAGR is
expected to 2015, with the key driver being ramp-up of the Oyu Tolgoi
project (complemented by partial grade rebounds in the more mature
assets). First commercial production from Oyu Tolgoi is still expected in
2013, however a concern was noted that power supply negotiations
between the governments of Mongolia and China have yet to be resolved,
and the provision of power was now on the critical path.
 In the Energy business, the Australian coal operations are reported to
have largely recovered from the floods in 1Q11 and the company is
targeting 73mtpa of coal from its Australian operations (100% basis) by
2015. In Mozambique, Stage 1 at Benga is on track for commissioning by
year end and the company is projecting 25mtpa coal production by
2020. However, the capital intensity pressures for Australian mining
projects were again evident in the rise in the coking coal mine life
extension at the Kestrel mine to $2bn from $1.1bn previously.
 Platts has reported that a six-month semi-soft coking coal deal has been
settled between a small Australian miner and Japanese mills at $176.5/t,
only 62% of the prevailing hard coking coal price. However, we think it
unlikely that the larger semi-soft producers (Xstrata, Rio Tinto) will agree
to such a fall, with a Q4 settlement in the $190-195/t FOB Australia region
more likely.