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
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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.
Price uncertainty
Huge uncertainty surrounds where prices are likely to go.
Chinese moves to clean up their heavy-polluting industrial sector has triggered a swift collapse in iron ore prices for the first time since July 2020.
Prices last Friday and Monday dipped below the $100 per ton mark.
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According to a draft guideline released on Thursday, the Ministry of Ecology and Environment intends to monitor 64 regions during its winter air pollution campaign.
Evergrande crisis sparks concerns over Chinese economy
Iron ore, copper and other commodities may be further hammered following news of the crisis at Chinese developer Evergrande. Markets across the globe fell sharply Monday as Evergrande, one of the biggest property developers in the country, Evergrande threatened to default on loans worth U.S. $300 billion.
This has sparked off worries about the economy. It could also cause downturns in construction and demand for raw materials.
Iron ore’s fall
Since May, iron ore prices have fallen by more than half. China, the world’s biggest steelmaker, has tightened production curbs. Furthermore, China’s property market is experiencing a sharp downturn.
MetalMiner has previously reported on China’s move to cut down its steel production to curb pollution.
The Chinese government has announced plans to scale down the steel industry, which accounts for between 10-20% of its carbon emissions. The country has also raised tariffs on steel-related exports, effective as of Aug. 1, 2021.
China’s increased appetite for iron ore has become a problem for neighbor India.
In the first four months of 2021, ore exports from India increased by 66% to 22.42 million tons (MT). As much as 90% of this went to China, according to Business Today.
China is the largest consumer of iron ore. The country imports about 70% of the world’s production. Last year, it imported a record 1.17 billion tons.
The spike in iron ore exports is becoming a problem for Indian steelmakers, as they are struggling to get this critical raw material. Some have now demanded that the government ban iron ore exports from India.
The iron ore price has been about as volatile of late as most of us can remember.
The price powered relentlessly upwards this year on the back of surging demand from China and constrained supply from Brazil.
Then, after hitting a peak May 10 and 12, it fell sharply into bear territory, as Beijing sought to dampen inflationary raw material costs by issuing a string of warnings about speculation and excessive pricing.
Having achieved its objective in dampening prices, you would think Beijing would have left it at that.
But last week, China’s Ministry of Industry and Information Technology said it will seek to establish a mechanism to contain steel output based on carbon emissions, pollutant discharges and energy consumption, Bloomberg reported.
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Iron ore bounces back
Iron ore promptly bounced back, climbing more than 6% in Singapore. Meanwhile, steel futures in Shanghai recovering on fears of constrained steel supply.
Iron ore prices’ relentless rise this year went into overdrive Monday, hitting a +10% limit up and prompting the Dalian Commodity Exchange to raise trading limits and margin requirements in an effort to calm speculation.
Separately, the Shanghai Futures Exchange said it would set fees for closing positions on its steel rebar and hot-rolled steel coil futures contracts at 0.01% of the total transaction value. Those transactions had previously been free.
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Meanwhile, on the Singapore Exchange, the June contract for iron ore leaped 10.3% to a record $226.25 per ton.
Despite fears this would squeeze mill margins, sales prices moved in tandem. The South China Morning Post reported nearly 100 Chinese steelmakers adjusted their semi-finished steel prices sharply upwards yesterday to compensate.
The MetalMiner Best Practice Library offers a wealth of knowledge and tips to help buyers stay on top of metals markets and buying strategies.
Strong iron ore demand
Iron ore prices have been rising on the back of strong demand. Increases of this magnitude and at this speed could not occur in a weaker demand environment.
This morning in metals news: MetalMiner’s Stuart Burns weighed in on the outlook for iron ore prices and steel prices throughout the remainder of this year; the unemployment rate was unchanged in April; and the copper price has soared past the $10,000 per metric ton mark.
Commenting on MarketWatch, MetalMiner’s Stuart Burns said steel prices are likely to lose some steam in the second half of the year. In turn, so will iron ore price.
However, the drop is not likely to be significant. In fact, he noted he expects prices to remain elevated for the balance of the year.
“Iron is experiencing a perfect storm at the moment, Beijing’s environmental constraints are having a two-pronged impact on prices,” he told Marketwatch.
Unemployment unchanged in April
US unemployment checked in at 6.1% in April, the Bureau of Labor Statistics (BLS) reported.
This morning in metals news: MetalMiner released its May MMO report earlier this week; US crude oil imports from OPEC are down; and the International Energy Agency issued a report on clean energy and the expected surge in critical mineral demand.
The MetalMiner Best Practice Library offers a wealth of knowledge and tips to help buyers stay on top of metals markets and buying strategies.
May 2021 MMO report
Earlier this week, MetalMiner released its May 2021 Monthly Metal Outlook (MMO) forecast report.
The report — available only to subscribers — offers detailed analysis of 10 key metals. The coverage includes support and resistance figures, price drivers, buying strategies and much more.
Seaborne iron ore prices hit a 10-year high this month at $178 per ton before profit taking. Investors bet on strong steel demand and robust consumption in top consumer China.
But following the release of details in China’s new Five-Year Plan calling for wide-ranging and ambitious targets to reduce environmental pollution, iron ore prices experienced a sharp sell-off. Investors took profits at the prospect that steel production could be restricted by Beijing in an effort to reduce pollution.
Steelmaking is a major source of pollution in China. The steelmaking process is estimated to account for about 15% of the country’s total emissions.
So it is hardly surprising investors took profits at the prospect of the steel industry potentially facing significant environmental controls and increased efforts by Beijing to close excess steel production.
EAF acceleration
What the Five-Year Plan may well accelerate is adoption of electric arc furnace (EAF) steelmaking as blast furnace operators switch to scrap consumption to reduce pollution.
EAFs are a significantly less polluting production method than traditional blast furnaces. However, that is only the case if the electric energy source is not totally from coal. Unfortunately, much of China’s still is.
Still, if pollution is measured at the point of production rather than mine to finished product, EAF will be a winner.
Beijing has already reclassified and eased steel scrap imports late last year, possibly with an eye on encouraging adoption of such less-polluting technologies.
Higher-purity iron ore
There will likely also be greater use of high-purity iron ore and pellets, with Fe purity percentages in the mid- and upper-60s. Both offer a route for blast furnace operators to reduce their pollution levels. For more modern, efficient mills they can mitigate penalties or meet threshold targets.
The premium for high-grade iron ore is already a record above low-purity material. This is in part because supply sources are limited. Those with the highest purity resources are charging a premium. One reason why imported iron ore volumes are so high — domestic production is generally of low Fe purity material, which consumers have shunned more and more.
Peak iron ore price?
For the time being, mills are making good money and can afford the cost.
However, if steel demand were to drop this year, iron ore prices could see further falls.
As such, have we reached peak iron ore?
The short answer? Maybe. Much will depend on how enthusiastically (and how quickly) Beijing and state governments apply the edicts of the new Five-Year Plan. In addition, it will depend on how quickly last year’s stimulus measures begin to lose their impact on the economy.
China’s bounce-back has been impressive. Beijing, however, is doing a lot behind the scenes to slow the growth of debt and give the property market a gentle landing.
For the first time in decades, the US could have a higher rate of growth this year than China.
But the US is not a market for seaborne iron ore, so China remains the principal driver of price direction.
The MetalMiner Best Practice Library offers a wealth of knowledge and tips to help buyers stay on top of metals markets and buying strategies.
If we think copper, zinc, and even aluminum have performed well this year, none of them are a patch on iron ore.
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Iron ore prices rise
China’s iron ore imports fell for the second straight month in November. Imports dropped by 8.1% from a month earlier, Reuters reported.
However, prices still rose strongly.
China brought in 98.15 million metric tons last month, compared with 106.74 million tons of imports in October. Nonetheless, the November total rose 8.3% from November 2019.
The report went on to say that for the first 11 months of the year, iron ore imports stood at 1.07 billion tons. Meanwhile, full-year imports totaled 1.06 billion tons in 2019.
Imports seem to be constrained due to availability rather than lack of demand. Quite the contrary, prices are continuing to rise.
Spot iron ore hit the highest level since December 2013 last week. The Dalian Commodity Exchange price climbed a further 2.8% to Yuan 928 per metric ton (over $141 per ton). That is a rally of 50% since this time last year. The price is also up 72% since the end Q1 China lockdown crash pushed prices below $80 per ton.
Infrastructure stimulus investment and a strong construction market have supported steel prices. As a result, steel mills have been producing flat out and drawing down port stocks of raw materials like iron ore.
According to another Reuters report, imported iron ore stocked at 45 Chinese ports dipped for the fourth week over Nov. 27 to Dec. 3. Imports fell by 1.6 million tons from a week earlier to about 124.5 million tonnes, mainly due to lower arrivals.
An article in the Australian Financial Review (AFR) underlines the bullish narrative accompanying the iron ore price’s performance this year.
“Chinese steel consumption has just blown consensus out of the water this year,” the report notes, citing analyst comments, adding, “The macro backdrop, in terms of China, is very strong for all commodity consumption, and steel and iron ore is doing particularly well.”
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Rising money supply
The post points to rising money supply, which moved up 10.4% year over year in August, as a market-leading indicator of further strength in demand this year and iron ore producers’ relative underperformance relative to projections.
That is particularly true for Vale, which would need to achieve a run rate of close to 400 million tons per annum for the second half of the year to achieve its earlier production guidance of between 310 million and 330 million tons as a whole after a poor, COVID-impacted first half.
Source: Australian Financial Review
Iron ore price recovery
The recovery in iron ore prices has been impressive.
Dalian iron ore has risen more than 60% this year. The Singapore SGX benchmark has gained about 50%, underpinned by China’s strong demand, Reuters reported. China continues to ramp up steel output after rolling out infrastructure-led economic stimulus measures.
Source: Australian Financial Review
Relatively robust steel prices and a lack of significant inventory build despite record-high run rates supports a story of strong demand recovery. Meanwhile, the rising iron ore price provides support for steel prices. Margins remain constrained, meaning mills have little scope of overproduction if prices were to slide in an oversupplied market.
This morning in metals news: MetalMiner released its May MMO report earlier this week; US crude oil imports from OPEC are down; and the International Energy Agency issued a report on clean energy and the expected surge in critical mineral demand.
