Current dry spell in iron ore spot prices is likely to worsen as mill owner’s scamper for safety amidst demand debacle from the reality sector. Many steel mills, including almost half of those in the industry-heavy Tangshan belt of Hebei province, have halted ore imports. The mills seemed satisfied in decimating existing stock rather maintaining a reserve. The near total absence of buyers augurs worse for the market.
In this changed scenario the quarterly pricing is likely to be the first casualty as the spot prices might just succumb below the benchmark. Spot prices have declined by more than 20% since 30th April.
It is expected that spot prices could ease to USD 120 per tonne in the third quarter, which could spur buyers to switch over to spot purchase.
The concurrent global upheavals like the financial crisis likely to acquire pandemic proportions and the Chinese government relentlessly pursuing a purging policy in reality sector to weed out malpractices a revival seems remote for now.
However over the long term import of iron ore is bound to resurrect owing to inherent reasons as follows:
1. Poor domestic ore quality continually raises cost of steelmaking
2. Use of domestic iron ore is unviable with a capital expenditure of USD 150 per tonne, and operating costs around USD 60-80 per tonne, highlighting imperativeness of imports.
When that happens could depend on how successful Chinese policymakers are in reassuring steelmakers that curbing property speculation won''t mean a collapse of the housing market and the broader economic climate.
However on a durable basis if steelmakers are expected to replenish their ore stocks, there needs to be a re stimulation of downstream demand, to bring steel prices back on rail.