A relentless growth in demand, coupled with supply constraints, saw thermal coal prices almost double during 2007. Supply was further impacted in early 2008 by short-term problems (e.g., flooding in Australian mines, power outages in South Africa and the cold snap in China) that drove spot prices even higher. Although prices have since eased slightly, AME forecasts that the supply-demand equation will remain Tight as a Drum in 2008.
After many recent dramatic developments in the iron ore industry, it is with a sense of intrigue that we move into 2008. A number of questions remain unanswered: will the Big Three deliver on ambitious expansion plans; will Chinese demand hold firm in the face of a potential global slowdown; will steel price increases curb growth; will BHP Billiton succeed in acquiring Rio Tinto; will Chinese domestic iron ore producers continue their tremendous production growth; will Australian miners receive their desired 'freight premium'; and in the immediate future – just how much ore will Fortescue ship this year? Each one of these questions has the potential to shape 2008. The Stage is Set.
AME’s forecast of a surplus for 2008-2010 is to a large degree reflective of our call on whether or not mine openings and mine expansions will come on stream in the forecast timeframe and whether or not these mines will meet production targets. The quantum of the surplus is also influenced by our bullish view that growth in demand from China will continue in the double digit range in spite of a slowdown in the USA and EU15 countries. Of our forecast increase in zinc consumption from 2007 to 2012 we estimate that China will account for 65% of this increased demand. If our forecast of demand from China is too optimistic then the zinc surplus will be larger than anticipated and prices should decline further than we have forecast.
As prices ease from 2007 peaks the new supply that came on as a response to high prices – primarily Chinese origin nickel pig iron, will combine with the traditional supply projects that are nearing completion (Ravensthorpe, Onça Puma, and Goro) to create a structural surplus which we expect to remain fundamental to the nickel market in the medium term. Nickel producers will be forced to Pay the Piper through price related demand substitution as increasing numbers of end users of stainless steel have shied away from the price of nickel-containing grades – both due to the magnitude of the price hikes and extreme volatility demonstrated over the past year.
This year, the world steel industry is anything but static. Following on from the recent announcement of a 65% rise in iron ore benchmark price, global steel producers also have to brace against the Tidal Wave of price increases. Price increases are expected in pig iron and scrap due to potential shortages in coking coal – where the 2008 contract price has more than tripled – and a reduced supply of cheap steel exports. A surge in steel production costs seems to be inevitable. However, input prices have given a degree of justification for the significant increases in steel prices. Although steel producers‘ increase in revenue should increases substantially, AME believes that steel producers will be forced to record lower profits this year with smaller steel mills will being hit the hardest.