Global Steel Demand To Remain Substantially Weaker

Global steel demand is likely to be substantially weaker in 2009, affecting sales of Australian iron ore and coking coal, a new analysis shows.

The analysis by National Australia Bank paints a gloomy picture for Australian coal and iron ore exporters, adversely affected by the troubled United States economy.

"The World Steel Association forecasts global steel demand to fall by around 15 per cent in 2009 after declining 1.4 per cent over 2008," the NAB analysis said.

The findings come as Australia's largest coal and iron ore producers remain in negotiations with big steelmakers from Japan and China to determine 2009 contract prices.

The NAB report said steel use in the US is expected to fall by 36.6 per cent over 2009.

"The slump in the US and parts of emerging Asia will obviously have substantial implications for Chinese and Japanese exports," the report said.

"This suggests much of the outlook for global steel production growth and hence demand for Australia's coking coal and iron ore resources of the near-term is levered to the pace of a turnaround in the US economy."

Rio Tinto Ltd announced recently it had reached an agreement with Japan's Nippon Steel Corporation to sell iron ore at prices between 33 and 44 per cent lower in 2009.

China is pressing for larger cuts and there is a risk their iron ore imports may weaken this year because steel production is outpacing underlying demand, the report says.

The report said that even if Chinese steel production was curtailed in the short term, global output should increase robustly during 2011, leading to higher prices.

It said BHP Billiton had reached an agreement with Mitsubishi Corporation and Nippon Steel for a contract price of $US128 to $US129 per tonne for coking coal, a 57 per cent drop compared to last year.

The report also said the low prices for coking coal could lead to mines in the US and Canada cutting production, leading eventually to supply constraints.

"Over the next two to three years, we see coking coal prices gradually increasing from current levels as the global economy recovers, with upward price pressure in 2011-12," the report said.

For thermal coal the report said Xstrata had recently agreed to a contract price with Japan's Chubu Electric Power that led to a 44 per cent drop in the contract price.

According to the NAB report, slumping Japanese demand for thermal coal is likely to be exacerbated by a planned emissions trading scheme in that country.

Source: WA Today