Global iron ore prices have witnessed an upswing of
late. Compared with the lows in mid-Nov’21, iron ore futures and spot prices in
China have risen by about 25%.
However, there are greater restrictions on steel
production in autumn and the country’s production has remained low, while the
demand for raw materials has decreased. So, what is the logic behind iron ore
prices rebounding?
On 12 Dec, benchmark Fe 62% iron ore fines was
assessed at $110/t CFR China, which is an increase of 26% compared with the low
of $87/t in mid-Nov. In the same period, the port price of imported iron ore in
China also rose from RMB 566/t ($89/t) to about RMB 700/t ($110/t), an increase
of nearly 25%.
The main contract price of iron ore futures in China
is currently around RMB 642/t ($101/t), up more than 25% from mid-Nov. This
year, the autumn and winter production restriction policies have become
stricter for the industries in China’s north, and demand for iron ore has not
expanded.
Coke price cuts benefit steel mills
The rise in iron ore prices may have to do with
expectations in the market, says Wang Guoqing, director of Lange Steel Research
Centre in China. Since Nov, the profit per tonne of steel has been restored and
the market is expected to stimulate the industry to increase production, he
believes.
In Nov, met coke prices went through eight rounds of
declines – a total of RMB 1600 ($251/t), driving the profits of steel mills.
In Jan-Oct’21, China’s crude steel output declined
year-on-year. Earlier, some industry insiders had estimated that if the daily
crude steel output level of Oct was maintained in Nov-Dec, the annual crude
steel output would fall by 40-50 million tonnes (mn t). But if this is the
case, it will far exceed the goal of reducing production. Therefore, the market
expects that even if production rebounds from Oct levels the policy goal of
reducing output can be achieved.
High inventory to dampen price
Data released by China Iron and Steel Association
(CISA) reveals that since Nov, the daily output of crude steel in China has not
increased significantly. The demand for iron ore has not increased either. The
port inventory stands at around 155 mn t – considerably higher than around 122
mn t in same period last year.
Naturally, experts predicted that current round of
iron ore prices lacked support, and did not rule out speculation. In the medium
and long term, under the condition of no obvious changes in supply and demand,
iron ore prices also have no basis for rising sharply.
It is relatively reasonable, therefore, if the spot
price of iron ore is in the range of $80-100/ in the mid-term. If it exceeds
$100/t, the fundamental demand side is not supported and if it falls below
$80/t some high-cost mines may withdraw from the market, which will balance out
supply.
Source: SteelMint.com