Ferrexpo Expects Iron-Ore Demand, Prices to Soften in 2H — Commodity Comment

Ferrexpo PLC on Wednesday reported that profit increased significantly in the first half driven by stronger iron-ore prices, but expects demand for the commodity to ease in the second half. Here’s what the Switzerland-based, Ukraine-focused company had to say:

“High grade (65% Fe) iron-ore prices as assessed by S&P Global Platts increased significantly during 1H 2021 compared to 1H 2020.”

“Tight market conditions for global iron-ore pellet supply, combined with increasing demand for pellets as steelmakers seek to increase productivity and lower emissions, resulted in the S&P Global Platts Atlantic pellet premium rising to US$54 per tonne in 1H 2021 (compared to US$30 per tonne in 1H 2020).”

“C3 freight rates rose by 72%, or the equivalent of US$9, to an average of US$22 per tonne in 1H 2021 as a result of higher oil prices and an increase in demand for vessels.”

“Revenues in 1H 2021 benefited from higher iron-ore pricing and pellet premiums, offset by higher international freight costs, and as a result, increased significantly to US$1,353 million in 1H 2021 (1H 2020: US$776 million).”

On the iron-ore market:

“The key driver for this increase in demand in iron-ore in 1H 2021 relates to governments around the world providing economic stimulus packages in response to the global Covid-19 pandemic, which in turn has driven end-user demand for a range of steel products.”

“The supply-side response to this increase in demand has seen a 10% increase in apparent iron-ore production in 1H 2021 on a global basis (versus 1H 2020), the equivalent of approximately 110 million tonnes of additional iron-ore.”

On the iron-ore fines market:

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“Published sales data for the major iron-ore producers in 1H 2021 indicates that iron-ore shipments from the Pilbara Region of Western Australia remained in line in 1H 2021 relative to 1H 2020, whereas published sales data for a major iron-ore fines producer in Brazil shows an increase of approximately 15%, or the equivalent of approximately 20 million tonnes.”

“This limited supply-side response to rising demand from steelmakers, particularly for high-grade iron-ore, is a key factor in the recent strength of iron-ore prices.”

On the iron-ore pellet market:

“Global pellet export volumes have remained in line in 1H 2021 on a year on year basis, reflecting reduced pellet supply from pellet producers in Brazil and Canada, which have been counterbalanced by increasing supply from producers in the CIS region and India.”

“It is expected that the current global shortage of iron-ore pellets will ease during the remainder of the year, with pellet supply recovering and global steel demand easing.”

“Demand for iron-ore pellets from steelmakers in China remains strong, despite the global market balance reverting to its historic sales patterns.”

“With China representing approximately 73% of the global consumption of iron-ore fines in 2021 (equivalent to 999 million tonnes), any increase in pellet demand from this destination will likely have a material impact on global iron-ore pellet export trade, which is much smaller than the global export trade in iron-ore fines.”

“Overall demand for iron-ore pellets has remained strong in these two regions in 1H 2021, with exports up 9% and 7% to the Middle East and Americas respectively.”

On the steel market:

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“In April 2021, the World Steel Association reported that global crude steel production had risen to 1,878 million tonnes in 2020, up from 1,874 million tonnes a year earlier, with this growth coming despite the global Covid-19 pandemic restricting economies around the world.”

“This growth in production in 2020 is symptomatic to the robust global response to the pandemic, which has stimulated demand throughout the steel value chain.”

“Regions that are typically associated with purchasing DR pellets, such as the Middle East and North America, have also seen growth in steel output in 1H 2021.”

On costs:

“The group’s production costs increased in 1H 2021 as a result of higher energy prices, including the cost of fuel (including diesel), natural gas and electricity, which collectively account for approximately 40% of the group’s C1 cash costs of production.”

“The prices for fuel (including diesel) and natural gas were affected by the increase of prices on the global market during the first half of 2021 whereas costs for electricity were affected by an increase of the tariffs in Ukraine.”

On the outlook:

“To date, iron-ore fines prices have remained strong throughout the majority of the global Covid-19 pandemic, which relates to a direct response by sovereign governments to stimulate economies and counter the financial effects of measures taken to stem the spread of Covid-19.”

“The group expects the influence of these fiscal policies to ease in the second half of the year, with demand for iron-ore declining from the record levels being seen at present.”

“Iron-ore futures contracts also indicate a fall in iron-ore pricing in the second half of 2021, with contracts for delivery of iron-ore (62% Fe) December 2021 priced at US$180 per tonne as of 28 July 2021, compared to a spot iron-ore price of US$201 per tonne as of the same date.”

“As of July 2021, the consensus forecast for iron-ore prices (62% Fe) in 2021, based on a grouping of 11 investment banks, was US$170 per tonne for the full year, implying a decrease in the average iron-ore price by approximately US$15 per tonne in 2H 2021 from the level seen in 1H 2021.”

“The World Steel Association expects that the growth in global steel demand will slow during the remainder of the year, with demand increasing by 6% for the full year 2021.”

“With this reduction in demand, prices are expected to decrease, with lower iron-ore fines prices reducing the group’s realized price for iron-ore pellets and the group’s overall profitability.”

“Global steel demand is forecast to increase by a further 3% in 2022.”

Write to Jaime Llinares Taboada at jaime.llinares@wsj.com; @JaimeLlinaresT

View more information: https://www.marketwatch.com/story/ferrexpo-expects-iron-ore-demand-prices-to-soften-in-2h-commodity-comment-271628060071

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