Iron ore supplies are expected to improve in H2 2021 (June-December), while demand could be impacted by production cuts in China stated Vale’s business update for Q1. The company expects the undersupply scenario to continue in Q2 FY2021.
In Q1 2021, iron ore Fe 62pc reference price averaged $166.9/dmt, 25pc higher than Q4 2020. Iron ore prices rose due to a seasonal supply crunch in Q1, low inventory, and strong demand from China post the Lunar New Year. Last week, Vale reported Q1 iron ore production at 68mn mt, up by 14.2pc from the prior year, while maintaining its full-year guidance at 315-335mn mt.
The company noted that further restrictions on crude steel production due to environmental policy could boost prices to very high levels. China could be shifting its steel export volumes to the domestic market, which could boost steel prices elsewhere and support high steel margins.
Environmental restrictions could impact coal mining in China, lowering coal supply in the domestic market and supporting higher prices. Ex-China, a ramp-up of crude steel production could increase coal demand. High steel margins along with higher coal/coke prices are expected to support iron ore premiums through 2021, Vale indicated.
In Q1, China’s crude steel production rose by 15.6pc to 271mn mt due to a low base in the prior year and robust demand. Further curbs for decarbonization in China’s steel sector are likely to raise demand for high iron ore grades.
In the rest of the world, steel producers indicated growth prompting them to add capacity. New orders’ growth has accelerated in Europe and the US lifting HRC prices to record highs of $ 1,100/mt in Europe and $1,500/mt in the US. Turkey’s domestic demand drove steel production higher by 9.5pc in Q1 from the prior year. Healthy recovery in steel demand from all-consuming sectors is expected for 2021.
Vale indicated that East Asian steel mills are expected to ramp up production to cater to new orders from downstream industries, especially from the auto sector, from both domestic and export markets. Combined steel production in Taiwan, Japan, and Korea stood at 47mn mt in Q1, up 1pc from a year ago. However, challenges in the local market, including the shortage of chips for the auto sector has lowered production in April. Demand is expected to stabilize in H2.
In Southeast Asia, steel production is rising amid continuous investments in local mills to cater to improved domestic demand and for import substitution.
Highlights of Q1 FY2021
* Vale’s ferrous EBITDA fell to $7.811bn, $989mn lower than Q4 due to seasonally lower sales volumes but partially offset by higher average sales prices of $1.853bn.
* Base metals EBITDA declined to $1.011bn, down by $160mn from Q4, mostly due to lower sales volumes of nickel and copper in addition to lower byproducts revenues from copper but partially offset by higher copper realized prices.
* In Q1, Vale posted a net income of $5.546bn, which is $4.807bn higher than Q4, due to expenses related to the Global Settlement for Brumadinho reparation in Q4, asset impairments in the coal and nickel business segment.