Have we already seen peak iron ore prices for this year?

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Iron ore — or at least iron ore producers — have had a pretty good pandemic.

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Recovering iron ore output

In Brazil, historic environmental restrictions and, at least in Q1 2020, heavy rains hampered Vale’s operations. In addition, the miner faced an ongoing impact on its workforce due to the spread of the virus in South America.

However, output came back as 2020 progressed.

Output averaged 4.48 million tons per month in the first half of 2020. However, output increased to 6.10 million tons per month in the second half, according to SPG Global estimates.

Australia’s iron ore sector and China tensions

 

Meanwhile, Australia had fewer environmental and pandemic-related challenges.

However, the country has been fighting an ongoing trade war with China. The conflict stems from Australian suggestions that China should investigate and publish details on the cause and early spread of the COVID-19 virus from Wuhan.

Beijing has reacted negatively to those suggestions. In turn, it has applied sanctions on Australian thermal coal and other commodities in a bid to get them to retract the demand.

As a result, China has tried to dissuade purchases from Australia. However, with supply out of Brazil hampered, Australia still secured the lion’s share, amounting to some 60% of Chinese iron ore imports.

Iron ore prices

Sensing a strong demand market and constrained supply, mills rushed to draw down port stocks.  In addition, investors bought the Dalian exchange, driving a price rise from an average of $94.06/mt this week last year to $167.04/mt on Jan. 2 this year.

In between, the price plunged in the midst of the Chinese lockdown. The price then peaked in late December 2020 at $172/mt — quite a roller coaster.

The fluctuations showed just how exposed the Chinese steel industry is to Australian supply.

China’s dilemma

A Forbes article discusses China’s dilemma. Beijing would dearly like to see Australia’s majors, such as Rio Tinto, BHP and their challengers, invest in additional mine capacity to create more supply options.

At the same time, Beijing is funding Chinese miners to develop resources elsewhere, such as the giant Simandou mine in Guinea.

Australia’s miners are, therefore, not incentivized to pour capital into new mines if they are likely to hit fierce competition 3-5 years down the line.

For the time being, they are trading on their estimated $14/ton cash cost and reap the massive profits ensuing from sales prices likely to be well north of $100/ton for the next couple of years at least.

Outlook in 2021

Australian Mining quotes Trading Economics data suggesting prices in 2021 should fall as the first half unfolds.

The data suggest prices will probably ease to $151.50/mt by the end of Q1 and $132.33/mt by year end as demand softens and supply from sources like Brazil improves further.

Finished steel prices in China have fluctuated strongly through the winter. Rebar prices are coming under considerable pressure, but coil prices are holding up well. That disparity underlines the relative strength of manufacturing compared to construction.

In 2020, iron ore demand proved to be extremely strong, as infrastructure investment drove a robust recovery in the economy.

But as the effects of those stimulus measures ease through 2021, demand should soften. In turn, mill output will, too — and, hence, iron ore demand.

With volatile steel markets, knowing which strategy to execute and when can make all the difference between saving and losing money. See how MetalMiner looks at different market scenarios. 

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