Steel-Insight: Iron Ore Not Worth Getting Excited About

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Iron ore has certainly been volatile so far this year. It jumped from the low $40s/ metric ton or 62% Fe fines on a delivered China basis to over $70/mt in April. It now stands at just below $50/mt.

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In percentage terms, those are big moves in a short period of time, but frankly at Steel-Insight, we find this irrelevant. In context, the recent moves don’t hold a candle to the fundamental shift in the product’s shift from $200/mt in 2011 to the current level. Now that was a generational change.

Iron Ore Monthly Average Prices ($/Metric Ton cfr China 62% Fe fines)

steel_insight_ironore_053016_350

Source: Platts

In terms of the monthly average price, which is what many steelmakers’ costs outside of China are linked to, the moves have been relatively small from around the low $40s to the high $50s. For steelmakers, even that $20/mt change in iron ore costs actually only add $30/mt to their total cost structure (around 1.5 mt of iron ore is required to make a tonne of steel).

Meanwhile, North American steelmakers have seen steel prices rise from $360/short ton for HR coil at the beginning of the year to current levels of $620/short ton. The fact that ore costs may have gone up $30/mt in that period is pocket change.

Not a Long-Term Concern

Moreover, the rapid change in prices has clearly been a short-term event. It was driven by a modest improvement in steel market demand in China. However, this was compounded by the massive liquidity boost to the Chinese market that was seen in Q1 this year that the Chinese government injected in order to stave off an excessive slowdown. That allowed steelmakers, which had been forced to idle in late 2015 due to lack of credit, to secure iron ore and return to steelmaking. Their buying drove modest gains in iron ore pricing.

However, the market was turbo-charged by retail Chinese investors. Responding to the rising price and also public statements from Chinese political leadership, vast amounts of speculative finance surged into iron ore futures in China. In one day in April, the turnover in volume on the Dalian iron ore contract exceeded the combined turnover of all equities trading in China with pricing up 19%. Upon tightening access to trading, this liquidity ebbed as did the price. The most volatile pricing moves were not, therefore, an indication of fundamental demand.

Supply/Demand Picture

Fundamentally, iron ore is going to be boring for the next five-plus years. There is simply too much supply available to a steel industry where global demand is not growing. We expect iron ore prices to hit the $30s/mt for a period in the second half of this year and stay there for an extended period, with pricing moving in the $30-60/mt range for the next five years, i.e. exactly the trading range that they have been in the for the last year.

That will mean more pain for global iron ore miners. For steelmakers and steel buyers, however? A long period of low prices will be welcome….and boring.

Steel-Insight is a steel industry price-forecasting publishing company, based in Toronto. James May, the firm’s managing director, has been a steel industry analyst for 15 years and advises some of the major global steel trading companies, steel producers and steel consumers on the outlook for steel pricing and industry trends. For more information, visit www.steel-insight.com.

 

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