Iron Ore

Steel prices in China have been rising, but iron ore prices have been falling — what’s going on there?

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China is shutting domestic iron ore mines at an accelerating rate, forcing steel companies to import iron ore from overseas, which would normally be supportive for the iron ore price.

The answer it would seem, as is so often the case, has more to do with speculators’ view of future fundamentals than actual current fundamentals.

Strong Chinese Demand for Steel

Steel prices in China are strong because steel demand remains robust, despite exports being crimped by protectionist measures in North America, Europe, India and elsewhere. Domestic demand is holding up well.

Meanwhile, supply-side action by Beijing is cutting swathes of steelmaking capacity. Initially, much of the cuts came to “illegal” production, such as EDF scrap based long products mills — which has happened largely under the radar — but also older, less efficient and more polluting steel plants. All of this follows Beijing’s pledge to cut 50 million tons this year as part of an environmental drive to reduce air pollution by November (the start of the winter heating season).

Source Financial Times

After strong price rises this year, investors have done well and are now taking their profits ahead of a perceived fall in demand, as steel curtailments really begin to bite later in the year. It would be a brave speculator who bet against the wave of negative sentiment toward the iron ore price, including even the Australian government, which has been warning of price falls.

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This morning in metals news, the recent agreement between Tata Steel and Thyssenkrupp to merge their European operations will likely mean job cuts at the U.K.’s biggest steel plant, copper moves up and Rio Tinto will deploy driverless iron ore trains in western Australia.

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Fallout of the Tata-Thyssenkrupp Deal

After more than a year of anticipation and talk, Tata Steel and Thyssenkrupp recently announced they had reached a deal to merge their European operations.

This was exciting news to some, but not to workers in the U.K., who expressed fear at the possibility of job cuts.

According to a Reuters analysis, the U.K.’s biggest steel plant, in Port Talbot, will likely be the first to face the scythe of job cuts. The plant directly employs 4,000 workers.

Copper Moves Up

Copper futures gained Monday in a slow trading day, according to a Reuters report.

The metal’s rise was in part attributed to growth in Chinese manufacturing.

Three-month LME copper was up 0.4% to $6,509 per ton earlier today.

Driverless Trains

Driverless cars are the wave of the future — but what about driverless trains?

Rio Tinto will use driverless trains for the transportation of iron ore in western Australia, according to Reuters.

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The iron ore miner recently completed its first long-haul journey (60 miles), with a completely autonomous locomotive, according to the report.

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This morning in metals news, the International Trade Commission rules that imports of solar cells are hurting U.S. manufacturers, iron ore enters a bear market and the UN proposes that businesses take responsibility for environmental pollution.

A Bear Market for Iron Ore

The price of iron ore has undergone the biggest weekly fall in 16 months, Bloomberg reports. Having slipped into a bear market, the metal was trading at $63.56/ton on Friday, more than 20% lower than its August 21 high of $79.93/ton.

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We may see this price slump to continue for the near future. Some expect the price of iron ore to drop to the $50s in the fourth quarter. If China’s steel production cuts do go into effect as planned this winter, the country’s steel output may decrease as much as 30 million tons, thus cutting iron consumption by 50 million tons.

End of the U.S. Solar Boom?

The U.S. International Trade Commission voted in a 4-0 decision on Friday that the U.S. solar energy industry is being hurt by foreign overcapacity and cheap solar cell imports, the Washington Post reports. However, the proposed 40-cent-per-watt tariff on solar cells would double the price of solar panels, putting pressure on the rest of the U.S. solar industry.
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This morning in metals news, Chinese steel production once again hit a record last month, copper took a dip, and the gap between high-grade and low-grade iron ore grew larger as China attempts to combat its smog problem.

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Steel Output Hits New Record in China

Steel mills in China cranked up production levels en route to hitting a new monthly production record, according to Bloomberg.

According to the report, Chinese crude steel output hit 74.59 million metric tons in August, surpassing the previous peak of 74.02 million in July.

Copper Falls Back

Copper has been having a good year, but it fell to a four-week low Thursday as a result of what Reuters calls lackluster Chinese economic data.

What appears to be slowing demand from China, the world’s top metals consumer, contributed to the metal’s drop, according to the report.

Premiums Soar for High-Grade Iron Ore

Sticking with the China theme, Reuters reported the gap between high-grade and low-grade iron ore in China grew as a result of the country’s efforts to fight pollution.

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The trading gap between the two forms of ore was at its highest since August 2011, according to the report.

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Before you get into your planned Labor Day festivities, let’s take a look back at some of the stories here on MetalMiner from the past week:

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  • After a somewhat stagnant run, aluminum had a strong August — why? Our Stuart Burns covered aluminum’s upward momentum last week.
  • Ah, the North American Free Trade Agreement (NAFTA), the deal that’s stayed in the news for much of the year. President Donald Trump recently renewed rhetoric threatening the 23-year-old trade agreement on the heels of the completion of the first round of negotiating talks held in Washington, D.C. We recapped the recent developments in the ongoing talks held by trade representatives of the U.S., Canada and Mexico.
  • Speaking of trade agreements, talks are also underway between the U.S. and South Korea on KORUS, the free trade deal the two countries began in 2012.
  • China was reportedly amenable to making further significant cuts to tackle excess capacity, which has been a major talking point, not just for the U.S., but the global market. However, President Trump rejected China’s proposal. Burns offered his analysis on the situation.
  • It’s been a mostly good year for base metals — but not every metal has joined in on the fun, as our Irene Martinez Canorea wrote last week.
  • Hurricane Harvey inflicted a severe toll on the people of southeast Texas and southwest Louisiana. Now, there’s a long road ahead to recovery, both in terms of the humanitarian and economic impacts of the storm.
  • Burns looked to the the so-called “lucky country” of Australia, which is rich in iron ore. But what happens when iron ore reserves are exhausted? Answering the question briefly: look to the sun.

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Australia is sometimes called “the lucky country.”

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Although the phrase is usually meant positively to reflect its bountiful natural resources (and sometimes to its isolation from conflict and strife elsewhere in the world), the original meaning was not so complimentary.

At the start of the last chapter of Donald Horne’s book “The Lucky Country,” a passage reads  “Australia is a lucky country run mainly by second rate people who share its luck. It lives on other people’s ideas, and, although its ordinary people are adaptable, most of its leaders (in all fields) so lack curiosity about the events that surround them that they are often taken by surprise.”

Personally, my experience of Australians has been very favorable: there is no one we like better beating at sports, they have a good sense of humor and are one of the few societies that have maintained a reasonable work-life balance.

But maybe part of that comes from those bountiful natural resources, much like Norway and a few other mature but resource-rich economies. The country is partially supported by exports of commodities they have in abundance. The Reserve Bank of Australia estimated in 2014 that household incomes across the country were 13% higher than they would have been without the mining boom and real wages were 6% higher.

Just like a Norway without oil and gas, without iron ore, coal, natural gas and other natural resources Australia’s economy would have to work a whole lot harder to just tread water.

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Before we head into the weekend, let’s take a look back at the week that was.

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  • In case you missed it, our August MMI Report is out. Metals like copper and aluminum hit record highs, and nine of our 10 sub-indexes posted upward movement as a result of a strong July. Will that momentum continue? Check back next month for the September MMI report.
  • Many have predicted a decline for iron ore prices, but as our Stuart Burns wrote on Monday, reports of its demise have been greatly exaggerated. A weak U.S. dollar, combined with strong equities and global GDP, have helped keep iron ore performing well, not to mention Chinese steel and the wider metals market. Read through for Burns’ assessment of the iron ore market.
  • In India, a boom of bauxite production is expected, wrote our Sohrab Darabshaw. In fact, it is expected to more than double by 2021. How is that possible? One reason, Darabshaw writes, is “increased domestic demand for aluminium, which will largely be sourced from the quintupling of land under mining lease in the Odisha province (which has the bulk of India’s bauxite reserves).”
  • One commodity almost everyone is interested in is oil. On Tuesday, Burns wrote about the future of oil prices. But, since this is MetalMiner, after all, those prices also have an effect on metal markets.
  • Everyone loves a good M&A story, and Burns had one earlier this week on the ongoing talks between Indian steel giant Tata Steel and Germany’s ThyssenKrupp. Plus, he touches on ArcelorMittal’s takeover of Italy’s Ilva. Burns writes: “For the first time in years, steelmakers at least seem to have a plan and are actively pursuing it. Whether that plan is to the eventual benefit or detriment of consumers remains to be seen — but a healthier domestic steel industry must certainly be advantageous to all.”
  • How about zinc? Burns wrote about the metal’s rise to $3,000, and the reasons behind zinc’s price hitting its highest point since 2007.
  •  Last week was a busy one for the U.S. Department of Commerce, which handed down preliminary determinations in countervailing duty investigations for both Chinese aluminum and silicon coming from a trio of countries.
  • Back in India, steel exports are on the rise as the Indian government’s protectionist measures seem to be paying off for its domestic industry.
  • Lastly, representatives of the U.S., Canada and Mexico began talks on Wednesday regarding renegotiation of the North American Free Trade Agreement (NAFTA), the trade deal instituted in 1994. The U.S. is focused on, among other things, bringing down ballooning trade deficits with the two countries (particularly Mexico). The talks are scheduled to continue until Sunday, so check back for updates on the proceedings.

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The demise of the iron ore price has been repeatedly predicted but has failed to materialize over the last few months. Miners line up to announce strong sales and yet repeatedly voice notes of caution that excess supply could overwhelm the recovery.

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Yet the market continues to be confounded by not just a rising iron ore price, but continued strength in Chinese steel prices and a wider strength in metals prices.

Several factors are feeding this robust performance and it will take a reversal of one or more factors to spark a change in direction of metal prices.

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This morning in metals news, China pressured iron ore traders not to buy from North Korea even before the newest round of U.N. sanctions were imposed, a Chilean copper company is preparing to invest in Mongolia and China produced a record amount of steel in July.

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China Puts Pressure on N. Korean Iron Ore Business

As the political situation on the Korean peninsula continues to intensify and President Donald Trump criticizes China for allegedly not doing enough to rein in North Korea, a Reuters report indicates China has taken some action against North Korean interests.

According to Reuters, China pressured its iron ore traders not to buy North Korea iron ore, pressure that even preceded the latest round of U.N. sanctions.

Per two traders Reuters spoke to, the Chinese government stopped issuing permits to bring in iron ore “several weeks ago.”

Codelco Looks to Make Investment in Mongolia

Chilean state miner Codelco is planing to make an investment in faraway Mongolia, Codelco’s chief executive told Reuters on Friday.

According to CEO Nelson Pizarro, the company is looking for medium-term investments in the country, which may have untapped copper deposits.

Chinese Steel Output Hits 74M Tons in July

Chinese steel producers had a prolific July, churning out  a record 74 millions tons, Reuters reported.

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The output bested the previous month’s then-record total of 73.23 million tons, reached in spite of government efforts to combat pollution.

It won’t have escaped your notice that the shine has gone off the metals market.

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Prices have been softening across not just metals but other commodities, like oil, too.

Consumers, of course, will not be complaining, but are nevertheless keen to understand what is going on and whether we are seeing a temporary dip or a move into a prolonged bear period.

Commodities in general are facing multiple headwinds.

While demand for iron ore and oil is steady, both markets are in oversupply. Oil prices have received short-term support from favorable comments around output cuts. Prices have subsequently continued to soften as long positions have been unwound and investors have concluded prospects of a supply balance are receding.

In China, the authorities have been squeezing investors by increasing shadow banking borrowing costs, resulting in positions being unwound and prices softening.

In the U.S., markets surged after President Donald Trump’s election victory with the expectation his campaign promises of trillion dollar infrastructure investment would create a building and consumption boom.

Since those heady days, the realization has set in that the desperately needed investment may not be quite as significant as first thought.

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