China Steel Production Killin’ It, So Will Iron Ore Prices Drop?

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Exceptional circumstances excepted, market iron ore prices are driven more by demand than supply.

The seaborne iron ore market is adequately supplied and with more supply options coming on-stream, it takes an exceptional situation like India’s clamp-down on mining in Karnataka and Odisha, or the imposition of a 30% export tax to seriously impact the iron ore supply market.

Both have had a profound impact on India’s balance of iron ore trade – India was once the third-largest exporter of iron ore in the world, according to Reuters, sending out about 98 million tons, or 47% of its total production, in the year ended March 31, 2011, from about 207 million tons of production. Since then, the country’s output of iron ore is estimated to have fallen to about 140 million tons in the year ended March 31, after a ban on mining in Karnataka and Goa, which has now been partially relaxed.

today's metal prices - MetalMiner IndXThe cessation of exports caused a spike in seaborne iron ore prices, but this year prices of iron ore have been in decline even as steel production has remained robust in China.

Steel Production Numbers in China

The month of May represented a record peak for China steel production of 67.03 million tons (when normally, the market is going through a seasonal decline). June has declined slightly from May, but is still up 4.6% from the same month last year.

Reuters observed that the Shanghai Rebar Futures Jan-14 contract contango to spot has closed in to RMB27/ton for the October forward and RMB107/ton for the January forward, and suggested this was indicative of investors judging spot pricing as beginning to look “toppy,” or likely to fall.

Interestingly, in spite of frequent predictions of excess steel production in China, Standard Bank reported crude steel production in China picked up towards the end of June when it would normally be declining. Annualized production is currently running at just under 800 million tons, yet finished steel inventories fell by 0.87 million tons to 12.68 million tons.

Overall, warehouse steel inventories have fallen below a critical 15-million-ton watermark to 14.73 million tons, off 0.22%. This suggests, the bank says, inventories are finally back in good shape, relative to underlying demand. As a result, Chinese mills should be able to extract some pricing power with end-consumers and indeed, producers such as Jiangsu Shagang and Wuhan Iron & Steel have raised their prices for bookings over the next term, according to Reuters.

Iron Ore Price Outlook

The traditionally quieter summer period must kick in soon, and in spite of lower inventory levels currently boosting production, a drop-off in iron ore purchasing would be expected from here on out. Prices are likely to trade sideways over the summer months as the market remains busy, yet well-supplied.

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Read more from Stuart Burns.

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