On the face of it, there appears to be a disconnect between the state of China’s steel market and the price of seaborne iron ore.
As Reuters observes, China’s steel industry is already feeling the pain from sluggish demand amid disruptions to economic activity and restrictions on transportation to restrain the coronavirus epidemic.
China’s iron ore imports in February are running well below preceding months and the corresponding month last year as steel mill inventories rise, finished steel prices are flat, and deliveries are hampered by transport restrictions and a lack of construction activity.
Yet, the iron ore spot prices extended gains to hit fresh three-week highs late last week, with the benchmark 62% grade settling at $88.50 a metric ton in Shanghai. The price on China’s Dalian Commodity Exchange rose 1.0% to 628.50 yuan ($90.01) a ton, advancing for a fourth straight day, and climbed 6.4% from last week. Singapore iron ore was steady at $86.04 in afternoon trade, the article reports.
Concerns about supply had been circulating after Brazil’s Vale posted Q4 results showing a sharp drop in output following dam ruptures and bad weather last year. Vale’s fourth-quarter production fell 22.4% from the same period last year and a 9.6% drop from the previous quarter. The failure of a tailings dam in late January last year in the town of Brumadinho resulted in the death of some 270 people. The incident led to serious production stoppages; Vale’s recent filings showed the events cost the company some U.S. $671 million in costs and provisions.
Even so, Vale is holding to revised output figures for 2020 of between 340 million and 355 million metric tons, slightly below 2018 but not enough to cause a global shortage.
At some point either iron ore prices are going to fall or Chinese demand is going to ramp up rapidly.
The market is betting on Beijing stimulus measures as soon as the coronavirus is seen to peak and be brought under control.
However, with no immediate prospect of that, you have to think the market is running ahead of itself.
Stocks and commodities are beginning to show the markets have discounted the worst-case scenario of a global pandemic and are beginning to look at what comes next when infection numbers fall (hence the media’s obsession with those daily infection rates).
Has investor optimism gotten ahead of itself or will it be proved right? The next two weeks will tell the story.