Iron Ore

Anyone looking at the seaborne Asian Iron ore market? A cursory glance at China’s iron ore market and one has to ask, “what’s going on?”

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Iron ore prices have been on a roller coaster this year, yet reports abound of excess iron ore supply, excess steel production, excess steel capacity and falling property prices and, by extension, excess appetite for construction steel.

There is still mine oversupply. Source: Adobe Stock/nikitos77.

There is still mine oversupply. Source: Adobe Stock/nikitos77.

This week, reports of rising port stocks, up 1.6% to 100.45 million metric tons or five weeks of supply should have depressed prices, but the prevailing mood among traders seems to be one of cautious optimism that iron ore consumption and, hence, steel production will continue strongly this year, so much so that iron ore prices actually rose 2.7% to $54.98 per mt late last week. Read more

Anglo-Australian mining giant Rio Tinto Group has submitted feasibility studies to the Guinean government for its massive Simandou project, considered the world’s biggest untapped iron ore deposit.

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The studies are a further step towards bringing onstream a deposit that holds more than 2 billion metric tons. The real cost of the project has yet to be revealed but it is tipped to reach $20 billion.

Finance Minister Says China Will Maintain Steel Tax Rebate

China will maintain its tax rebate policy for steel exports as part of its efforts to help the sector tackle its longstanding overcapacity problems, the country’s finance ministry said on Wednesday.

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Chinese steelmakers have relied on the overseas market to soak up excess production in the sector, prompting growing anti-dumping complaints from foreign competitors.

In a blatant case of posturing ahead of inevitable compensation negotiations, lawyers —acting on behalf of Brazil’s public prosecutors — are said to have lodged claims totaling $44 billion ($155 billion Brazilian Reais) against mining companies Vale SA and BHP Billiton for the collapse of a dam at their Samarco joint venture last year.

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Needless to say, shares in both companies promptly tanked about 6% even though the prosecutor’s office has a habit of claiming big and settling small. As a measure of just how absurd the figure is, the Financial Times states the 155 billion Reais claim is equivalent to twice Vale’s market value and, if enforced, would bankrupt the company leaving no one to clear up the environmental mess. You can bet the funds would disappear into government coffers, not for the clean-up.

Demands as Negotiation Starting Points

By comparison, the FT reports UBS analysts and others who pointed to the 2011 oil spill off the coast of Rio de Janeiro — that prompted prosecutors to claim $11 billion in damages from Chevron and its drilling partner Transocean — was eventually settled for only $42 million.

Indeed, if Brazil was to genuinely pursue the claim through to its logical settlement it would end up shooting itself in the foot. Samarco is a 50/50 joint venture and so would be the settlement costs but, where Vale is a wholly Brazilian company with 154,000 employees in the country, BHP is listed in London and Sydney with comparatively little else at risk in Brazil.

BHP has already written down its Brazilian asset from $1.2 billion to zero, meaning if it walked away it would lose nothing more, according to Reuters.

Samarco Disaster vs. BP Oil Spill

There is no disputing the dam burst was a disaster and there is widespread belief it could have been avoided. The torrent not only killed 19 people but also obliterated Bento Rodrigues, a town of 800, inundated another larger town with mud, and polluted almost 1,000 km (600 miles) of the Rio Doce.

According to Reuters, the disaster killed fish, contaminated water used for agriculture, and left at least 250,000 people without running water for weeks. It was always going to be expensive but BHP and Vale had already agreed to pay a government-estimated $5.6 billion (R20 billion Reais) over 15 years to cover and repair damages and the firms had thought that was an end to the claims process.

Comparisons have been made with claims against BP over their gulf oil spill naturally enough, but in reality there is little to link them. U.S. prosecutors had BP over a metaphorical barrel with its extensive investments in the U.S. market and could take them to the cleaners with impunity. Arguably, they would not have done the same to a U.S. company.

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Brazil would lose more in the long run doing the same to Vale than they would in ensuring the firm survives and, effectively, clears up the mess. So, while I don’t knowingly hold shares in either company I would be more likely to sell them over anxiety about the firm’s medium-term future in an oversupplied market than the damage overzealous prosecutors are likely to do their profits.

Chinese commodity futures markets experienced a broad crash Monday morning and a possible buyer for Tata Steel U.K. met with bankers Friday.

Chinese Commodity Futures Markets Crash

Chinese commodities futures fell almost across the board on Monday, led by 6% drops in steel and iron ore futures, as worries about waning demand in the world’s top consumer of most industrial materials extended last week’s slide.

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Speculative funds had rushed into China’s commodities futures last month, betting that the country’s economy was bottoming out, alarming exchanges and regulators who feared a new bubble was forming as volumes and prices soared.

Excalibur Meeting With Banks Over Possible Tata U.K. Purchase

Excalibur Steel, the management buyout group interested in purchasing Tata Steel‘s assets in Britain, met with bankers on Friday to seek financing for the deal. Tata U.K. executive Stuart Wilkie, who leads the group, said that it will hold talks with one British and three international banks to present its proposal to save the loss-making business from the threat of closure.

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Brazilian prosecutors threw investors into a panic on Wednesday after demanding $44 billion  (155 billion Brazilian Reais) from major mining companies Vale SA and BHP Billiton over the collapse of a dam at their Samarco joint venture last year that ranked as the country’s worst environmental disaster and killed at least 17 people.

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The 359-page civil lawsuit filed by federal prosecutors on Monday and announced late on Tuesday came as a shock to many investors, who had hoped that a settlement signed with the government in March worth 10 billion Real would draw a line under the bulk of claims relating to the disaster. However, a Brazilian judge on Thursday ratified the original settlement between BHP Billiton and Vale and Brazil’s federal government. The move potentially saps some of the energy from the $44 billion lawsuit, but it’s still very much alive.

China Begins Closing Coal Projects

China will take stronger action against illegal coal projects as it tries to tackle a massive capacity glut in the sector, the country’s state planning agency said, after ordering the closure of 38 projects. The National Development and Reform Commission (NDRC) ordered the immediate closure of the projects for breaching industry policies, it said in a notice posted on its website on Friday.

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This is part of a large-scale crackdown by Beijing on coal and steel overcapacity.

U.S. construction spending increased in March to its highest level in more than eight years and our Construction MMI shot up 15.9% along with it. Gains in home building and nonresidential construction offset a drop in government projects.

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Construction spending rose 0.3% in March after a 1% gain in February, the Commerce Department said Monday. The back-to-back increases raised total spending to a seasonally adjusted annual rate of $1.14 trillion, the highest level since October 2007.

Construction_Chart_May_2016_FNL

 

Residential construction grew at a 14.8% annual pace in the first three months of the year. It was one of the few sources of strength in a quarter in which the economy grew at an annual rate of just 0.5% — the slowest pace in two years.

Aluminum, steel scrap and copper all saw gains on the index, moves that are in line with the broad metals mix used in nonresidential and residential construction here in the U.S. In China, numbers are similarly positive.

Chinese housing data for March showed another increase in home sales, putting a dent in China’s housing oversupply and helping the construction reset there. As lower rates and yields work with a lag, sales growth could stay strong in China this year. A reduction in the requirement for a down payment by the central government is also underpinning increasing sales.

While China’s manufacturing purchasing managers index from Caixin Media and Markit Economics fell to 49.4, missing economists’ estimates for 49.8 and down from 49.7 in March, the construction numbers in the People’s Republic remain strong and could, theoretically, pick up the slack this year if manufacturing there remains depressed.

A total of 83.19 million metric tons of iron ore was discharged at Chinese ports during April, according to ship-tracking data compiled by Thomson Reuters Commodity Research and Forecasts.

This was up from the 81.76 mmt offloaded in March, suggesting that China’s iron ore import volumes will show an increase when preliminary customs data is released in the next few days.

Compare Prices With The April 2016 MMI Report

China is back to producing steel at a high rate. Even zombie mills have come back from the dead. While this might not be good for the oversupply situation, it is a good thing for construction estimators and procurement professionals looking for as many options as possible to fulfill orders and reduce prices via competition.

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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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