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Base metals should continue to do well in 2018 along with the US steel industry, though American coal will continue to lose ground to natural gas.
These are the key conclusions of Moody’s Investor Service, which released a recent report summarizing commentary from analysts at a Jan. 18 teleconference.
Probably the most positive aspects of the report, with the least conditions attached, relate to base metals. According to Moody’s, the recovery in base metals that began in 2016 and gained momentum in 2017, spurred by global economic growth, is likely to continue this year, driven by China which holds sway as a major base metals importer and exporter. However Moody’s points out that Chinese growth in 2018 is expected to slip to 6.6% from 6.9% in 2017, due to a slowing of stimulus measures that propelled infrastructure and property investment last year. Still, it expects that stronger Purchasing Managers’ Indices (PMIs) will remain strong in other economies, “providing better support to the market fundamentals than has been seen over the last several years.” In other words, base metals prices should remain strong. Moody’s gives a nice summary of what occurred within the base metals complex in 2017 and the factors that are driving prices up:
Prices rose across almost all the metals in 2017, as each responded to specific drivers including labor disruptions, mine closures and capacity curtailments in China, and legislative changes in other countries. This, in conjunction with actions such as reducing capital expenditures and dividends, enabled the industry to repair and strengthen balance sheets by materially reducing the amount of debt in the capital structure after years of excessive spending and value destruction.
Emerging mega trends, such as the increase in demand for copper, nickel, lithium, and cobalt tied to expected increases in production of electric vehicles, is also driving some of the current price momentum. Reduced investment in mined production over the past few years has led to a potential deficit in some of these metals, and meeting expected demand appears to present a challenge.
With respect to the US steel industry, Moody’s pointed out that higher drill rig counts created better demand for steel drill pipe producers such as US Steel Corp. – which allowed the company to almost break even in Q4 2017. Construction markets also grew steadily although margins for long producers of rebar were compressed by high imports. Demand for steel in autos is expected to be solid in 2018, while the piping and tubing sector should see better prices. Hot rolled coil steel prices have risen in 2018 to around $740 a ton from an average $620 in 2017. But a confluence of factors including China restarting steel mills idled in the winter, has Moody’s lowering the price range to between $650 and $700 per ton.
Moody’s also mentions increasing steel imports, which rose 15% to 35 million tons in 2017, “on widening spreads, improved energy sector dynamics and a rise in imports ahead of the outcome of an investigation by the Commerce Department into national security …read more
Source:: Infomine
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