Iron Ore is Defying Gravity (For Now)

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Despite the turmoil of an escalating war of words and the prospect of a full-blown trade war, the price of iron ore has remained remarkably robust this year.

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As the primary ingredient in the most basic of manufacturing materials, steel, you may be forgiven for expecting demand would have been shaken by the prospects of tariff barriers stunting demand.

However, a number of data points support the picture of continued strong iron ore mine output and demand.

Seaborne Iron Ore rices are being supported by strong demand from steelmakers in China. A combination of factors in China are driving this above and beyond simply robust steel demand.

The winter outputs cuts will happen this year, and contrary to earlier reports that they may be poorly applied – following Beijing’s delegation of the program to the state level – early signs are that the number of mills involved may actually be higher than last year, which was confined more to Hebei province.

According to Reuters, top steelmaking city Tangshan has already started production curbs from Oct. 1, while Handan city — also in smog-prone Hebei province — plans to enforce cuts from Nov. 1. The winter anti-pollution campaign may also expand to broader regions this year, the report states, as governments in the Yangtze River Delta, including the No. 2 steel-producing province of Jiangsu, work on a similar plan in northern areas.

In anticipation, steel mills are cranking up output. Blast furnace utilization rates at steel mills across China reached 68.23% in mid-September, the highest in two months, and have been hovering around 68% since then.

Not surprisingly, CISA data showed average daily crude steel production at its member mills rose to 1.98 million metric tons over Sept. 1-20 — up from 1.91 million tons in August and 1.94 million tons in July — as mills seek to produce as much metal as they can before they are forced to close lines. This strong output is pushing iron ore demand, with imports increasing 4.2% to 93.08 million tons last month from 89.34 million tons in August.

The second factor is a wider environmental clampdown is forcing steel mills to reduce pollution, not just in the winter but throughout the year.

They are in part achieving this by increasing the purity of the iron ore they use. Lower-grade material creates more pollution per ton of steel, and the purest grades are those for Rio and BHP in Australia and particularly Vale in Brazil. Even Fortescue in Australia is trading at a significant discount to the majors because its grade is lower.

Vale, on the other hand, is commanding a premium of U.S. $8.60 a metric ton over the benchmark price, up from U.S. $7.10 in the second quarter, according to the Financial Times. The so-called quality premia Vale receives is likely to increase as the company increases production from a giant new mine called S11D, which is currently operating at 70% of capacity. Making the most of strong demand, Vale produced 104.9 million tons in the third quarter, up 10.3% on the same period a year ago.

Some have been expecting iron prices to fall as trade rhetoric has ramped up, but iron ore producers themselves believe China will revert to form and ramp up infrastructure spending to sustain the economy, rather than admit tariffs and trade barriers are causing it any pain or hurting GDP growth.

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With steel inventories in China quite low going into the quieter winter months, if end-user demand remains as strong as expected, prices could actually rise further when steel mills return in the new year.

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