Iron Ore

If you had been asleep for the last month, woke up this morning and picked up a paper you could be forgiven for thinking you had been transported back to 2009.

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Chinese construction is up 20% last month year-on-year, Chinese loans were up 41% last month, the government is raising exchange-margin requirements from 5 to 8% to dampen rampant speculative behavior, should we go on?

Is it 2009 Again?

Turn to commodity prices, copper is up 20% this quarter, zinc is up 22%, iron ore has nearly doubled, hitting $70 per metric ton and a 16-month high according to Bloomberg. Steel mills in China, encouraged by rising prices and strong construction demand, churned out over 70 million metric tons last month, nearly equivalent to the entire U.S. annual output. Sound like the start of the supercycle to you?

Iron ore producers are trying to take credit for cutting back on expansion of iron ore mines and are indicating they would limit production to support prices, but, in reality, they are tinkering at the margins. Read more

With the stock market in a funk and property prices rising fast in China, some Chinese investors are turning to iron ore futures trading to make a fast profit.

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The chart below, from Westpac, shows the daily traded volume of Chinese iron ore futures on the Dalian Commodities Exchange back to when the market first came into existence in late 2013.

Westpac_Dalian_iron_ore_futures-550_032816

Day traders have reached a new speculative higher on Dalian iron ore. Source: Westpac.

It’s not the first time the Chinese market was swayed more by sentiment than reality.

What’s Really Going On?

Monitoring daily price movements in the domestic Chinese market (sign up for membership in our IndX if you would like to receive daily prices) gives MetalMiner the opportunity to keep a finger on the pulse of the country’s metals market, so when our editor, Jeff Yoders, remarked on the fluctuating daily prices for iron ore and coal on the Dalian exchange last week, we thought some of our readers may likewise by intrigued to know what is going on. Read more

Source: Adobe Stock/prima91

Source: Adobe Stock/prima91

Rising steel prices have impacted spot iron ore prices, which also rose, for the fourth straight session this past week.

According to a report from Business Insider, the iron ore gains came with another boost in Chinese steel prices and can be attributed to announcements made at the International Horticultural Expo, adding further weight to the argument that the government-mandated slowdown in steel production in China has impacted steel prices and, as a result, iron ore prices.

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It is important to note China’s unsold home inventory of 52 months given the current pace of sales and that the domestic real estate industry’s improvement may not last very long as a result, particularly as it relates to construction.

Steel Prices on the Rise Since February

According to a recent report from our own Raul de Frutos, steel prices have been on the rise since February and, at the same time, a broad recovery has also been underway among industrial metals due, in part, to a weaker dollar and rising oil prices.

“Steel prices are also getting a boost thanks to new anti-dumping determinations, a decline in US imports and a surge in iron ore prices. It’s pretty normal to see sharp rallies in bear markets only to then see prices fall again,” de Frutos said. “Indeed, we just saw that pattern in steel prices last year. It’s yet not clear how long this rally will last, but current macro-conditions will need to improve to make us think the rally is finally the one ending this bear market.”

You can find a more in-depth steel price forecast and outlook in our brand new Monthly Metal Buying Outlook report. Check it out to receive short- and long-term buying strategies with specific price thresholds.

Our Raw Steels MMI stood pat at 47 for a third straight month. However, things look better for the index after U.S. steel mills began raising prices previously this year.

Compare Prices With The February 2016 MMI Report

Not surprisingly, steel prices fared well as all industrial metals rose in February. This is not unusual, since steel buyers will be more willing to take a price hike while exchange-traded metals such as aluminum or copper are on the rise. Industrial metals rise in tandem when investors/buyers see some bullish developments such as the hope for another Chinese stimulus or a weaker dollar.

Iron Ore Prices Skyrocket

Over the past few weeks, iron ore prices have skyrocketed, going from $38 in December to $64 per metric ton in March. That’s a 68% rise in a little over two months, a price increase that no one would have expected. There are a few factors explaining the price hike.

Raw-Steels_Chart_March-2016_FNL

First, steel prices in China rose ahead of the construction season, leading to a surge in demand for iron ore. Second, the traditional Chinese restocking after the country’s lunar new year holiday also might have helped lift prices. In January, China imported 82.2 million metric tons of iron ore, up 4.6% year-on-year as steel mills replenished inventories. Finally, buyers saw short-term demand pick up after China boosted credit to the construction and infrastructure sectors. In February, China’s central bank guided its currency downward, suggesting there is still room for more monetary measures to boost the economy.

Nucor Stock Price Up

Nucor stock prices hits 6-month high

Nucor stock prices hit a six-month high. Source: MetalMiner analysis of @StockCharts.com data.

As iron ore prices rise, investors have moved money into steel companies such as Nucor Corp. The company’s stock price hit a six-month high in March.

U.S. Steel Imports Fall

Another factor helping U.S. mills to achieve higher prices was the decline in steel imports. In January, finished steel imports fell 40% compared to the same period last year, after a 36% decline in December. That made the capacity utilization rate in the U.S. rise back up to 70%.

Meanwhile, China exported 9.7 mmt of steel in January, a decline of 5.3% year-on-year, as markets took increasing anti-dumping measures against cheap Chinese steel. Also, China’s State Council announced an intention to close 100-150 mmt of steel capacity, potentially cutting as many as 400,000 jobs. Whether the shutdowns will follow the announcements is still unclear.

China seems to be finally preparing the country, both politically and socially, for future forced closures but these closures will probably take a lot of time to materialize, which could keep a lid on steel prices.

Is This Rally Sustainable?

That’s the million dollar question. Although most analysts agree that the long-term slowdown in China’s steel demand has not changed, so this rally could prove fleeting. This price rally might only lead to more production which will translate into higher steel inventories if demand doesn’t materialize. Confidence has returned to the market, but the question remains for how long?

We believe that China is the key to the sustainability of this rally, both in terms of supply and demand. Steel prices will likely follow the trend of the base metals complex. For that reason, it’s important for steel buyers not to focus only in the steel market but watch for clues in other metal markets.

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Today in metals, Chinese steel players and traders were bullish on new iron ore joint ventures from Brazil’s Vale SA and Fortescue Metals Group. China’s copper producers petitioned the government to allow blending of toxic concentrates at the nation’s ports.

Vale, Fortescue Joint Venture Could Attract Chinese Business

Planned joint ventures between major Brazilian iron ore miners Vale SA  and Fortescue Metals Group could make their supply more attractive for China’s mills, improving and adapting quality at lower costs, Chinese steel players and traders told Reuters.

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Vale and Fortescue, along with Rio Tinto Group and BHP Billiton, account for more than 70% of global iron ore exports.

Chinese Copper Producers Want Toxic Concentrates Blended at Ports

China’s copper industry is urging the government to allow the blending of raw material copper concentrate imports when they land at the country’s ports, which will allow for cheaper, though toxic, supply to arrive.

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Li Baomin, who is the chairman of China’s biggest integrated copper producer, Jiangxi Copper Co. Ltd., proposed that the government allow blending operations in “special administrative areas” at ports to help stabilize supplies of copper concentrates and cut buying costs, according to a report by China Nonferrous Metals News on Monday.

Goldman Sachs is still bullish on iron ore and China has set its first ever energy consumption target.

China Sets First Energy Consumption Target

China aims to keep energy consumption within 5 billion metric tons of standard coal equivalent by 2020, it said in its five-year plan published on Saturday, marking the first time the world’s second-biggest economy has set such a target.

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China has long been considering an energy consumption cap in a bid to improve industrial efficiency, tackle smog and control greenhouse gas emissions. China’s are the highest in the world. Beijing is also pushing structural reforms to decouple economic growth from energy consumption.

Goldman Sachs Still Bullish on Iron Ore

The rally in iron ore prices will not last in the absence of a significant improvement in steel demand from top consumer China, Goldman Sachs said, as the investment bank stuck to its bearish take on one of this year’s biggest commodity comebacks.

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Australia can’t believe its luck.

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The government is considering revamping the budget projections it only recently made on an iron ore price of $39 per metric ton. As Chinese steelmakers have ramped up production after their Lunar New Year break, the iron ore price has surged more than 13% so far this month to $47.

Iron Ore Prices Jump

In the first day after the lunar holidays ended, iron ore rose 5.6%, alone. It’s the first time the price has risen that much after the end of China’s festive season, according to Reuters. In Aussie there is talk about the impact the higher iron ore price could have on government coffers suggesting a sustained free-on-board price of about $44 could add a $1.2 billion windfall by the next mid-year budget, according to the Sidney Morning Herald.

Australia is suddenly awash in higher-priced iron ore at its mines. But is it a real price increase? Source: Adobe Stock/Imagevixen

Australia is suddenly awash in higher-priced iron ore at its mines. But is it a real price increase? Source: Adobe Stock/Imagevixen.

Share prices for BHP Billiton and Rio Tinto have also risen, climbing 17% and 11% respectively in the last few weeks as some in the market take the price increase as a sign that global demand for iron ore could increase significantly in coming months. Read more

The credit ratings agencies downgrading Anglo American PLC to junk status doesn’t sound the death knell for the mining giant, but it does underline that it has a very challenging future ahead of it.

CEO Mark Cutifani had come under a lot of criticism for not appearing to react quickly enough to the collapse in commodity prices last year, particularly in view of his firm’s mountain of debt, which was taken on when prices were on average some 50-70% higher than they are now.

Major Restructuring

Clearly, though, Cutifani wasn’t sitting on his hands. The restructuring plan he has come up with cannot be described as anything less than radical and if the firm gets the chance to successfully implement it, we will see a very different Anglo American a year or two from now.

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Source: Anglo American PLC.

Source: Anglo American PLC.

The intention is it will be a firm with much less debt, but also many fewer mines, fewer employees and active in fewer product areas. Indeed, the headlines have all been about the firm’s intended exit from iron ore and coal, leaving it active in just three commodities; diamonds, platinum and copper – pretty much back where it started. Read more

Stock markets are officially in bear territory. At least in Europe and Japan, they are, as shares fell more than 20% below their 2015 highs last week.

The US S&P 500, the Dow Jones Industrial Average and the NASDAQ composite briefly fell more than 3% to more than 10% below their prior peaks, meaning they entered a market “correction,” before recovering slightly. What caused such widespread chaos isn’t hard to find.

Equities have been dragged down by rising concerns over China, both growth and the falling yuan, by the wider global economic growth prospects, by sliding commodity prices, particularly oil, and questions over whether central banks remain willing to act as a backstop. With so much to worry about, investors dumped shares and bought safer government debt.

Resource Producers Hit Hardest

All markets have seen falls, but the most vulnerable and most resource-focused were hit hardest.

FT_Stockmarkets

Source: Thomson-Reuters Datastream.

All share groups have been hit, but mining and commodity related shares have been hit hardest as the Bloomberg Commodity index fell to its lowest since at least 1991, and crude oil prices fell below $27 a barrel during US trading. Read more

Freeport McMoRan is selling part of a major Indonesian asset to generate cash as iron ore prices keep falling. The International Energy Agency said oil prices will fall even lower this year.

Selling Part of its Crown Jewel

Freeport McMoRan‘s Indonesian unit has submitted a divestment price to the Indonesian government for an additional stake in one of the world’s biggest copper mines, an energy ministry official said last week.

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Freeport Indonesia must sell the Indonesian government a 10.64% stake of the huge Grasberg copper and gold complex in remote Papua as part of the process to extend its right to operate beyond 2021.

Freeport valued its Indonesian asset at $16.2 billion, Bambang Gatot, the ministry’s director general of coal and minerals told Reuters and other reporters, adding that the divestment offered to the government was worth $1.7 billion.

IEA: Yes, Oil Could Go Lower

The oil price is set to fall further this year as supply vastly exceeds demand, with major oil exporter Iran’s return to the market offsetting any production cuts from other countries, the International Energy Agency told Agence France-Presse on Tuesday.

“Can it go any lower?” the IEA asked in its monthly oil market report.

“Unless something changes, the oil market could drown in over-supply. So the answer to our question is an emphatic yes. It could go lower.”