Steel Price Forecast:
Steel price is forecast to retreat in 2022 as the rally is over globally, but US prices are likely to see some upside after the signing of President Joe Biden’s Infrastructure Bill into law in November 2021.
Supply to rebound
On the supply side, Chinese steel production in 2022 is expected to rebound slightly following significant year-on-year declines from July-September as a result of the Chinese energy crisis that dented industrial production in order to reduce pressure on the power grid.
Chinese steel production growth forecast is expected to be 5% year-on-year in 2022.
As government intervention in the coal sector has worked to ease the energy crisis in China, we expect steel production to start rebounding from the steep declines in the third quarter 2021.
Outside China, the US has significantly lagged behind global peers in restarting capacity following Covid-19 disruptions and production cuts. Going forward, expect more US supply to come back online and imports to improve over the coming months, gradually stabilising US steel prices in 2022.
China’s steel demand
China’s steel demand growth from the construction industry have largely peaked in the first half of 2021. While ongoing projects and new public infrastructure projects will continue to buoy steel demand during 2022-2025, we do not expect the strong demand impact that had stemmed from an acceleration of government stimulus since April 2020 to support the country’s post-Covid recovery to return in 2022 onwards.
With major construction projects reaching completion and the pipeline of new projects thinning with the Chinese Government focusing on tightening credit lines, Chinese steel demand from the construction sector is likely to weaken going forward.
In addition, there is rising risks to the Chinese property market following financial difficulties faced by Evergrande. If Evergrande’s difficulties spark contagion for a large number of Chinese property developers that may not be directly exposed, steel demand would be further hampered.
Upbeat US steel demand
In contrast to China, we are more upbeat for its outlook for steel demand in the US.
President Biden’s infrastructure plan will involve traditional as well as new infrastructure with spending spanning over eight years. Thus supporting steel demand along with other green metals like copper for a time to come.
Alongside traditional infrastructure like bridges, ports, roads and pipelines, Biden’s plan addresses climate change through a wide range of projects involving electrification, advanced manufacturing, clean technology, electric vehicles charging stations, broadband, and renewable energy.
Europe demand
European steel demand is also expected to rebound following the collapse seen in 2020 due to Covid-19.
We expect consumers, especially large automakers and electronic producers to prefer European steel compared with Chinese steel going forward to lower their emission. This is because European steel is mainly low-carbon steel produced at electric arc furnaces using scrap metal, while Chinese steel is mainly produced at blast furnaces requiring coking coal and iron ore.
We also expect more localisation of supply chains in the coming years leading to Western downstream industries consuming greater amounts of European steel compared to Chinese exports. This will be bolstered by rising prices of international steel that will make exports less attractive.
Long-term price outlook
We maintain our view for global steel prices to average $750/tonne in 2022 and $535/tonne over 2023-2025.
Ultimately, we expect that a combination of slowing Chinese steel consumption growth and rising global steel market protectionism prompting greater production in affected countries to loosen the market and drag prices lower in the medium term.
Chinese domestic steel demand is expected to slow overall in the coming decade compared to the last as the country shifts its economy away from heavy industry and towards the service sector resume. This will drag down domestic steel prices in China and the global average.
Exchange Rate Forecasts:
AUD:
We are steadily lifting our profile for the RBA cash rate target though with a forecast of 2.6% by year-end and 3.1% by 2023-end. Sentiment in AUDUSD though is currently being driven by the extreme risk aversion backdrop. Overall, AUDUSD continues to find solid support in the 0.6850 – 0.7000 region to target the 0.76-0.78 area over the medium term, but even more so against the likes of sterling. AUD also looks well supported against its peer CAD in the low 0.90s.
Forecast:
- AUDUSD: 6 – 12mths: 0.69
- AUDUSD: LT: 0.76
- Medium Term bias: Moderately bearish AUD vs USD; Moderately bullish AUD vs NZD
- Tactically AUD a buy on dips vs USD < 0.7000; tactically bullish AUD vs CAD, JPY and GBP
CAD
We expects BoC to hike rates by 50bps at each of the next 2 meetings with a cash rate expected to hit 3.0% by year-end. With the added support of higher oil prices, the positive commodities story adds to Canada’s solid terms of trade outlook which still continues to play out in favor of the Commodity Bloc (AUD and CAD). This makes CAD resilient against funding currencies JPY and GBP. USDCAD has closed above resistance 1.2945 and accelerated higher. Watch for a test of resistance 1.3077 (2022 high).
Forecast:
- USDCAD: 6 – 12mth: 1.33
- USDCAD: LT: 1.25
- MT Bias: Moderately bearish CAD vs USD but bullish on non-USD crosses
- Tactically neutral CAD vs USD
- Tactically bullish CAD vs GBP and JPY
NZD
Overall, NZDUSD has been trading in a 0.62- 0.65 range over the past month as Fed hawkishness and global risk aversion drives DXY higher but its resilience against the broader G10 FX base (especially GBP and JPY) should be noted. Ultimately though, NZD’s attraction comes from being a portfolio diversifier for investors too heavily positioned into AUD who want to enhance carry. NZDUSD approaches support at 0.6217- 32 (fibo 0.618 & 2022 low respectively) and a close below, if seen, could suggest a test of horizontal support at 0.5941 (76.4% Fibonacci).
Forecast :
- NZDUSD: 6 – 12 months: 0.62
- NZDUSD: Longer term: 0.68
- Medium term Bias: Moderately bearish NZD vs USD and AUD
- Tactically NZD a buy on dips vs USD < 0.6200; Tactically bullish NZD vs JPY and GBP
GBP
Sterling remains vulnerable especially on non-USD crosses (the commodity bloc – AUD, NZD, CAD), and now EUR and CHF, even if the MPC decides to hike 3 more times (to a cash rate of 2%) – it is still closer to the end of its tightening cycle than almost all other G10 central banks. GBPUSD is above the neckline of a potential inverted head & shoulders at 1.2204 (60 min chart). A close above, if seen, may suggest a target of 1.2477 with intermediate resistance seen at 1.2300 and 1.2387.
Forecast:
- GBPUSD: 6 – 12mth: 1.20
- GBPUSD: Long Term: 1.28
- Medium Term bias: Moderately bearish GBP vs USD, EUR and AUD
- Tactically bearish GBP vs USD, EUR, CHF, Commodity FX (AUD, NZD, CAD)
EUR
ECB’s “emergency” meeting in June sends a clearer signal of its commitment to stem antifragmentation risks which may restrain investor positioning for further aggressive periphery spread widening and material EURUSD depreciation. As a result, downside risks for EURUSD may be more limited. . EUR sentiment is also weighed by China’s Covid-related slowdown but an expected H2 recovery there may see these risks recede to provide better support to EUR vs a likely weaker DXY in H2 while other “buy on dip” plays in EUR may now include unwinding the EUR/ Commodity FX crosses.
Forecasts:
- EURUSD: 6 – 12m: 1.05
- EURUSD: Long Term: 1.10
- Medium Term bias: Neutral EUR vs USD and CHF
- Tactically neutral EUR vs USD & CHF – unwinding short EUR vs USD and Commodity Bloc (AUD, NZD, CAD) trades
- Tactically bullish EUR vs GBP and JPY
JPY
The BoJ is leaving the overall direction of USDJPY in the hands of US policymakers with the threat of FX intervention only designed to slow momentum rather than the overall direction. Highs in USDJPY may come somewhere between 135 and 140 ahead of July while the month of July itself may see more two-way flows (as Japanese banks buy USTs). Beyond July however, barring the BoJ tweaking its policy parameters (to which we attribute a 30- 40% probability after the Upper House elections), USDJPY will likely be driven by the extent of Fed hawkishness and direction of UST yields.
Forecasts:
- USDJPY: 6 – 12mths: 130.0
- USDJPY: Longer term: 122.0
- Medium term bias: Still elevated Yen weakness but peak bearishness to pass
- Tactically bearish JPY vs USD, EUR, CHF, Commodity FX (AUD, NZD and CAD)
CHF
EURCHF hits a 1.0169 low following the SNB’s 50bp rate hike and dropping of the reference to the “Swiss franc being highly valued”. But parity still looks difficult to breach in EURCHF as CHF is still likely to weaken against a more resilient EUR, given – (1) ECB’s recognition of the need for an effective anti-fragmentation tool, and (2) the ECB is likely to achieve a higher terminal rate than the SNB (1.25-1.5% versus 1%). For now, the 1.05 – 07 level in EURCHF probably caps CHF weakness while a push towards parity vs EUR may see SNB intervention to weaken CHF. USDCHF approaches good support between 0.9659-64 and a close below this range, if seen, could suggest a test of support at 0.9545 (May 27th low).
Forecasts:
- USDCHF: 6 – 12ms: 1.00
- USDCHF: Long Term: 0.98
- Medium Term bias: Neutral CHF vs USD, EUR
- Tactically a 1.00 – 1.07 range in EURCHF
USD
The terminal rate implied in the dots itself though, now appears more aligned to market pricing and with USD positioning at extended longs, there seems little incentive for hedge funds or real money accounts to price additional hawkishness – which potentially sends the first signal that DXY may be close to peaking at the 105 handle. The Fed tightening aggressively into a slowing US economy may be the 2nd signal that DXY may be close to peaking.
Forecasts
- DXY: 6 – 12m: 104.78
- DXY: Long Term: 99.33
- Medium Term bias: Neutral DXY
- Rapidly approaching a peak in DXY (ex GBP and JPY)
- Tactically bullish USD vs CAD
CNH
The path of least resistance for USDRMB still lies towards 6.80 – 90, albeit at a very gradual pace. Looking beyond July however, China’s growth momentum may swing to more positive while the US faces a more challenging environment of higher rates and slower growth. This divergence may then lead to USDCNH to stage a moderate reversal back to the 6.50-60 area.
Forecasts:
- USDCNH: 6 – 12mths: 6.95
- USDCNH: Longer term: 6.50
- Medium Term bias: Bearish RMB vs EUR
- Tactically bearish RMB vs USD
By Chiu Wei Li
Economist (Independent)
Former GIC, Head of Quant Team
Graduate from Oxford University, in Philosophy, Politics and Economics
www.es-mgt.com.sg