The vote by the UK to leave the EU has weakened sentiment in steel feedstocks markets
OREANDA-NEWS. The vote by the UK to leave the EU has weakened sentiment in steel feedstocks markets, and in the European steel market in particular, but is unlikely to significantly impact physical global trading of iron ore, coking coal or metallurgical coke in the immediate aftermath of the referendum, market observers told Argus.
In the US, today's developments could pressure domestic ferrous scrap prices in the next two weeks. Some participants expect domestic steel mills to take advantage of the currency change and book more scrap cargoes out of the UK. Bulk cargoes booked in May have arrived at US ports over the past two weeks and will help southeastern mills manage some of the tightness in prime scrap supply. The cargoes comprise a smaller percentage of shred which should suffice to keep shredded prices down in July trade.
US exporters of bulk ferrous scrap have begun offering scrap to domestic mills due to Turkey's resistance to higher prices. Turkish interest in UK scrap increased today and its buyers are likely to prefer EU and UK scrap due to the currency advantage versus a strong dollar. As a result, east coast bulk export scrap was offered into the midwest at $255/gross ton this week, which is around $10/gt below the price paid in the region for springboard scrap in June. No trade was confirmed at the price as some buyers believe that shredded scrap prices should drop by $15-20/gt for July trade.
Seaborne iron ore prices fell only slightly today after the outcome of yesterday's national vote on the UK's continued membership of the EU became known, with the Argus ICX price for 62pc Fe Chinese imported iron ore dropping by 15?/t to $51.75/t. Coking coal prices increased, meanwhile, with the value of premium hard low-volatile material rising by 30?/t to $91.10/t fob Australia.
"For iron ore and coking coal prices, China is the main driver, so there may not be any immediate implications of the UK leaving the EU for these industrial commodities," an analyst at a major European bank told Argus.
"The worry is that the fallout from the vote will evolve into a bigger European crisis and then into a global recession. China is vulnerable to any downturn in the global economy and this could be the bump in the road that leads China to a hard landing. Then, we might see commodity prices come down," the analyst said.
A raw materials buyer for a European steelmaker said it expected that the UK vote will negatively impact sentiment in the wider European steel industry owing to knock-on effects from a general weakening of the region's economy, and anticipates that this sentiment will weigh further on coking coal prices in the coming weeks.
Some major mining companies with financial or trading interests in the UK have been quick to allay fears that their businesses will suffer any sudden shocks from the UK's exit from the world's largest trading bloc, while others expressed uncertainty about the effect of the vote on their operations.
"We note the outcome of the EU referendum and respect the decision," UK-Australian iron ore and coking coal mining firm Rio Tinto told Argus. "We do not foresee any significant impact on our business in the short term, but we will continue to monitor this in the medium to long term," it said.
Rival iron ore and coking coal producer BHP Billiton, which is also based in both the UK and Australia, said it was braced for a turbulent time as the rest of the world reacted to the referendum result. "It is not yet clear how long the formal withdrawal will take and what the new UK-EU settlement will be. We expect there will be a period of uncertainty and volatility in global markets. But BHP Billiton is resilient and has the right commodities mix and balance sheet strength to withstand periods of increased volatility," the company told Argus.
London and Johannesburg-listed mining group Anglo American likewise expects uncertainty to be the major risk factor to its business, pointing out that it supplies only a few customers in the UK and Europe. "While Anglo American indicated its preference for the UK remaining in the EU, we… believe it is too early to comment on the implications of this decision. Anglo American does not do much physical UK-EU trade, so the implications are unlikely to have much direct commercial impact on us. However, the sooner there is certainty and stability, the better," the company said.
All three of the mining majors' share prices were hit hard in early London trading along with the entire FTSE 100, which initially dropped by 8.7pc when trading opened but recovered to close 1.9pc down. But their relative lack of direct exposure to the UK market meant that their share price declined less sharply than the day's main fallers, which saw losses in the 10-30pc range. Anglo American shares fell by 5.14pc, while BHP dropped by 1.63pc and Rio Tinto by 0.6pc.
One Russian coking coal supplier told Argus that it does not expect "any major movements" in its trade flows, particularly since it has recently diverted the vast majority of its shipments away from Europe to Asian customers.
Buyers of iron ore and coking coal in Europe expressed shock at the referendum result. "It is unclear what this all means, but the decision by the British people is a shock as we all thought that we would be better off in this globalised world by joining forces," one buyer said.
The buyers declined to comment on whether they anticipated difficulties in procuring feedstocks for UK blast furnaces, but economists have previously warned that a decline in the value of sterling will make imports more expensive. This includes imports of iron ore, coking coal and met coke, which are denominated in US dollars.
The value of the pound slumped by 13pc to its lowest level in 30 years earlier today as currency markets responded to the news that the UK will be leaving the EU, hitting a dollar exchange rate low of $1.32 in early morning trading.
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