UNITED STATES October 07 2016 2:49 PM

LONDON (Scrap Register): Although global steel production was up 1.7% year on year in August which represented the strongest growth in two years, year to date production is still down by 0.7% which continues to signal sluggish demand. 

Deutsche Bank continues to forecast positive global steel output with Chinese margins and improving utilization rates driving production into positive territory by year end. Although US GDP has disappointed, steel inventories remain low, which leave some room for production increases into the end of the year. 
Deutsche Bank retains their cautious outlook on the Chinese property market for next year, as this is the sector which is the most prone to policy risk, and forecast Chinese steel demand in this sector to be down 10% year on year. Infrastructure spend is unlikely to register another year of growth, and hence the bank expects Chinese steel output to be down 3% in 2017.

Vale’s investor day message of a managed ramp-up of their S11d project is an important shift in the iron ore market. The key question is whether the other three large iron ore producers (BHPB, Rio and FMG) will respond to Vale’s messaging in managing their own supply. 

In light of bank's cautious outlook on Chinese steel demand, they think that the Vale will have too much to do on their own to limit supply increases. The bank has already seen the peripheral countries, Brazilian mid tier producers and even Iran ramping up output and building new capacity in response to higher prices. 

Although the bank has trimmed their Vale production forecasts (and upgraded our 2017 price forecasts modestly), Deutsche Bank still see the iron ore market as oversupplied, and in order to keep a lid on production from these non-traditional; sources, the bank thinks prices will have to fall into the low USD40/t for a period.

Deutsche Bank upside risk scenario from the last quarter materialized with a vengeance. China’s 276-day working policy imposed on the Chinese coal industry had tightened the market, which had already destocked so all it took were some weather and geological related disruptions to squeeze the coking coal market, with seaborne hard coking coal prices doubling in the space of a month. 

The obvious question now is; “how long will it last?” In the 2011/12 rally, prices returned to their pre “spike” levels over a period of four quarter. During that period, the demand pull was much stronger, but this time round the US producers are in a weaker position to respond. 

Deutsche Bank thinks a combination of fading demand, a supply response from some of the swing producers, and a softening of Chinese policy will see prices return to sub USD100/t over a period of four to five quarters.