Iron ore price proving resilient despite slow global recovery

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bulk cargo iron ore
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Seaborne iron ore prices have remained stubbornly high.

Chinese demand and a stronger-than-expected Chinese recovery from the first-quarter lockdowns are driving prices.

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Recovering demand

Demand collapsed in Q1 during the lockdown but has recovered rapidly in Q2, originally for flat-rolled products as manufacturing for household goods and air conditioning as the high summer temperature approached. Automotive, however, remains somewhat depressed. Long product production has seen a later surge as the market stocks up ahead of an anticipated fall infrastructure demand for construction.

China has not imported significant volumes of scrap since a change in regulations in 2017. Levels have been controlled by import quotas. As such, demand has in part been met by importing semis, like rods, from Malaysia and billets from Russia.

But a relaxation of scrap import quotas is expected to drive a surge in scrap imports. The change could boost domestic electric arc furnace (EAF) and induction furnace (IF) producers.

Southeast Asian scrap users wary

Scrap consumers in the rest of Southeast Asia are watching developments with some degree of trepidation.

Those consumers are expecting Chinese scrap demand could drive up the region’s prices and reduce availability. Worst case, this could encourage resource nationalism. Countries could impose a ban or limits on scrap exports to protect domestic availability or cap price rises.

Ultimately, if scrap prices do rise, rebar and billet prices will likely rise. Excess Chinese production would struggle to find a home regionally, with many countries like Vietnam not allowing rebar imports.

Regional production outside of China is not especially robust.

Japan’s Nippon Steel closed six blast furnaces at the start of the pandemic. However, the company is suffering from poor demand (even during H2 2019). While JFE expects to bring its one closed blast furnace back on stream later this year, Nippon has no plans to do the same before 2021 — underlining the continued depressed nature of the market.

Well-managed supply from Australia and anxiety over availability from pandemic-hit Brazil will likely continue to support iron ore prices. As if to support supply constraints — or, maybe, in retaliation for political discourse with Australia — China imported iron ore from a wider range of sources in Q2 and Q3. The most notable import sources were Canada, Ukraine and India, Reuters reported this week.

Increased scrap imports could soften iron ore demand.

But, in reality, the level of substitution is going to be modest.

Analysts are expecting iron ore prices to remain elevated, coming in at least above $100 per ton for the rest of this year.

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