Chinese iron ore prices have certainly been on a roller coaster ride this year, hitting a record high in value terms after a period in which the price had risen and fallen sharply.
Futures on the Dalian exchange for delivery in January 2022 are now trading at RMB 777 per ton. That compares with about RMB 1,221 in May. However, prices are on the rise again, with futures climbing 50% in just the last three weeks.
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Complicated iron ore dynamics
The market is facing all kinds of contrarian dynamics.
On the one hand, steel production is rising in many provinces following power and environmental shutdowns over the summer.
On the other hand, debt-laden property group Evergrande is just the (admittedly very large) tip of the iceberg that is the Chinese property market. That is a market Beijing is clearly intending to curb and bend to its will.
While arguably overdue, the fact remains, construction absorbs some 25% of Chinese steel production. A slowdown in the sector will have a profound impact on Chinese domestic steel demand.
Huge uncertainty surrounds where prices are likely to go.
As Bloomberg points out, there is an energy crisis stretching from Asia to Europe. As a result, factories are shutting down and power bills are rising, in turn threatening to derail the global recovery from the pandemic.
China said it will allow power prices to rise by double the current limit. Furthermore, costs for the most-energy intensive industries — which includes metals producers — won’t be subject to a cap.
What’s more the country’s power shortage is likely to persist into winter and lead China into a short period of stagflation, with elevated producer-price inflation and pressures on growth. Yet despite such worries, iron ore and coal prices have been rising of late.
The best guess seems to be the iron ore price is betting on a bounceback in demand running into the buffers of limited short-term supply forcing steel mills to bid up the price for supplies.
However, the clouds gathering around the construction sector and the potential slowdown as a result of rampant energy prices — not just in China but around the world — slowing recovery could severely hamper demand and, therefore, prices in the medium term.
Does this iron ore price rally have the legs it showed in May for a rise to over $200/ton? It’s hard to see how it can.
Stop obsessing about the actual forecasted steel price. It’s more important to spot the trend.