JAPAN CRISIS: Iron, steel, coal markets evaluating quake impact

Singapore (Platts)--14Mar2011/107 am EDT/507 GMT

The ferrous sector was Monday evaluating the likely impact that closures of several Japanese steel mills, car plants and power plants would have on steel production and consumption, as well as on steelmaking raw materials such as iron ore and coking coal.

The scale of the disruptions on Japan's steel production and consumption were starting to come into focus. In terms of steel production, as of Monday lunchtime, only two Japanese mills still had their operations suspended, namely Sumitomo Metals Industries' Kashima Works and Nippon Steel's Kamaishi.

However, power rationing across eastern Japan will likely further impact production in coming days, a Tokyo trader added. This was confirmed by JFE Steel, which has kept its rolling and processing lines offline to save power.

Macquarie Commodities Research Friday estimated that 15 million-18 million mt of steel production could be impact in the crisis, adding that "given the large steel overcapacity globally, much of the reduction in Japanese steel output will be made up for elsewhere."

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On the steel demand side, Japanese carmakers were the most obvious casualty, with several plants closed, and stocks of cars earmarked for exports damaged by the tsunami. Steel demand should rise when reconstruction begins, but this is a longer-term prospect, market sources said.

"Steelmakers will be checking the new supply and demand situation and their shipping schedules, and only then will they be able to make decisions regarding their raw material purchases," one Japanese trader said.

"We expect some of the Japanese customers to declare force majeure [on coal purchases], an Australian coal mining executive told Platts Monday morning. Sources cited power and transport disruptions as the key reasons for the likely force majeure declarations.

The physical iron ore market has yet to show any immediate reaction to the situation in Japan, traders in Singapore and Beijing said.

Buying of seaborne iron ore by steelmakers in China, which determines benchmark prices used to price long-term contracts, has been anemic over the past week on weak steel demand.

A shipbroker in Singapore said iron ore deliveries into Japan could slow to a halt in the short term. "The long and short of the Japan situation is that infrastructure is a major problem on the eastern seaboard," he said.

Fortescue Metals Group, Australia's third-biggest iron ore exporter, has not seen iron ore shipments to Japan immediately affected by the crisis, a person familiar with the matter said.

Thermal and coking coal contract negotiations, which were under way as the earthquake struck, will inevitably be delayed as mills turn their attention to operational issues. JFE Steel will reportedly be cancelling all meetings with its coal suppliers this week, a source reported. This include sensitive talks with coking coal behemoth BHP Billiton-Mitsubishi Alliance regarding a possible shift to monthly pricing.

Thermal coal demand is likely to be reduced because of outages at several Japanese power plants.

Macquarie estimated Friday that Japanese seaside inventories amounting to 2 million mt of iron ore and 1 million mt of metallurgical coal may have to be deemed unusable.

--Julien Hall, julien_hall@platts.com
Keith Tan, keith_tan@platts.com
Melvin Yeo, melvin_yeo@platts.com