Have Bulk Commodities Peaked? Iron Ore Prices Make it Seem That Way

It seems like a bizarre question when iron ore has been on a bull run this year and coking coal producer Glencore has just agreed first-quarter contract prices with Nippon Steel that are the highest since 2011.

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But Morgan Stanley, in its 2017 Outlook, takes a bullish stance on base metals but forecasts bulk commodities such as iron ore and coking coal will do no more than tread water next year. Trying to call a peak in any market is, at best, a stab in the dark, but coking coal spot prices appeared to be easing just as contract prices set a new near-term record.

According to Reuters, miners working under the contract system have been receiving $200 per metric for their coal since October 1, and they were receiving just $81 per mt under the contract price as recently as the first quarter of 2016. For the period between January 1 and March 31 2017, Glencore and Nippon Steel have agreed that premium hard coking coal sold under the contract will be priced at $285 per mt.

Coking Coal Prices

The price agreed by Glencore and Nippon Steel was being adopted by rival miners, the article stated, quoting an analyst who said “Importantly, the new quarterly contract is being followed by other producers, including overnight by Canadian producer Teck Resources.”

However, the spot price for hard coking coal reached $308.80 per mt in November and it appears to have peaked at that height, slipping in recent days to be $274.40 per mt last week.

Spot Iron ore prices have also eased back recently from over $83 per mt to below $80, although whether this is the early stages of a reversal is too early to call. It is likely the price was driven higher by strong demand in the robust Summer and Fall months but may be easing now that the quieter winter construction period begins to bite. Back to Morgan Stanley, the bank is predicting an average price of just $58 per mt for iron ore next year as oversupply fundamentals reassert themselves.

Yet steel production, and therefore raw material demand, has remained robust in recent months. Reuters reports that China’s steel mills boosted their monthly output at the fastest pace in more than two years in November, putting the trend down to robust infrastructure demand. Even as higher iron ore and coking coal prices hit margins, a robust market enabled mills to raise prices and remain profitable. Output rose 5% to 66.29 million mt year-on- year, the fastest growth since June 2014, according to data from the National Bureau of Statistics.

Who Will Blink?

So what will give first? Is the drop in spot prices a sign that steel production is already easing, or will continued above-trend steel production reverse those spot price declines for iron ore and coking coal? For now, it could be a mismatch in timing, and our bet is, at least in the first half of next year, steel production will pick up again and with it spot raw material prices. Where it goes after that depends much on the availability of credit and continued infrastructure investment in China.

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A slowdown is in the cards — every previous stimulus supported rise in activity has been followed by a slow down as retail property development overheats or the infrastructure funds are used up. But will president-elect Donald Trump’s plans then take over boosting demand in the U.S.? Probably not before 2018, so H2 2017 could indeed see a decline in raw material prices. We shall see.

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