Chinese steel production has soared in recent months, hitting record highs in August, at least based on official measures.
The combination of bloated steel mill margins, robust demand and upcoming production cut on environmental grounds has proven to be a potent mix, seeing steel mills pump out record amounts of steel in order capitalise on strong profitability conditions.
Throw in heightened levels of speculation in Chinese commodity futures markets and prices, be it for steel or inputs such as coking coal and iron ore, soared from mid-June.
However, that all changed in September, with prices going into reverse, and hard.
Suddenly, steel inventories started to increase, margins were eroded and concerns over the impact of production cuts on demand for iron ore and coking coal started to bite, turning the tailwinds that drove the rally in prior months into stiff headwinds.
The question now is what happens next.
Will the selloff extend longer-term, or has it run its course?
To Gerard Burg, senior Asia economist at the National Australia Bank (NAB), it’s likely to be the former.
However, unlike some other more bearish forecasters, he thinks the declines will be pretty mild in nature with the exception of coking coal.
Here’s his latest forecasts for iron ore and coal until the end of 2018.
“Iron ore prices have retreated rapidly in recent weeks, dropping by 20% across September. This likely reflects slowing purchases from Chinese mills ahead of the November-March capacity shutdown,” he says.
“We see the spot price trending around the $US60 a tonne mark across the next year, given ample supply in global markets.”
That’s not far off its current level of $61.48 a tonne, according to pricing from Metal Bulletin.
And that’s largely representative of Burg’s view on the outlook for coking coal prices, albeit for slightly differing reasons.
“Prices are expected to ease from levels near $US200 a tonne over coming months, as weaker Chinese steel production impacts demand, heading down to US$100 a tonne by the end of 2018,” he says.
In comparison, Burg says that thermal coal will likely buck the downward trend.
“Spot prices for thermal coal have remained above the 2017 Japanese financial year contract price [of] $US85 a tonne in recent months,” he says.
“Reflecting the strength of these markets, we have revised our forecast for the 2018 contract to $US80 a tonne from $US65 a tonne previously.”
After enjoying a week off for National Day celebration, activity in spot and futures markets looks set to pickup next week as Chinese markets resume trade.