Source: Australian Financial Review
Chinese steel makers upset at rising iron ore prices are unlikely to get much respite – unless their own demand for the commodity suddenly plummets.
That’s the view of Credit Suisse analyst Matt Hope, who says iron ore supply will struggle to keep up with demand as Australian, Brazilian and domestic Chinese iron ore miners are unlikely to increase production.
“The mills are wishing for a ‘reasonable’ price, but they can’t wish away the supply shortage arising from mine woes in Brazil and [Western Australia], and China’s demand for prompt cargoes is growing as booming steel production chews through China’s tradeable port stocks,” Mr Hope said.
News last week that eight Chinese steel makers, members of the China Iron and Steel Association, had resolved to pressure Beijing to investigate the 70 per cent rise in iron ore prices this year sent ripples through the market, with the spot price of iron ore falling $US8 on Friday to $US114 a tonne.
But the price quickly rebounded, rising 2.5 per cent on Tuesday night to $US121.57 a tonne.
Mr Hope said although trading in iron ore futures on the Dalian Commodities Exchange had played a role in setting sentiment in the iron ore market, there had been little room for speculation in the seaborne iron ore market, from which spot pricing was taken.
This price is set via a daily auction of spot cargoes of iron ore, where the winner has bought a cargo of up to 150,000 tonnes of ore, plus a letter of credit from the bank to buy the cargo, worth as much as $US20 million ($29 million) at current prices.
“In the physical market, if many cargoes are offered, but few bids received, the price will fall. And if there’s a lot of bids for cargoes, but limited available, the price climbs. That’s the situation now, and it’s not obvious what CISA can do about that,” Mr Hope said.
Production from Brazilian giant Vale has plunged since a tragic mine disaster in January, while a string of production problems at Australian mines hampering supply from Rio Tinto and BHP over the past year – including train accidents, mine planning problems and bad weather – has further crimped supply.
China’s domestic iron ore mines have not come into the market as in previous periods of high prices, as China’s strict air pollution standards have seen many small and medium-sized iron ore mines shut down in recent years.
Mr Hope says best estimates suggest 2019 production is running at an annualised rate just 5 million tonnes above last year’s production of about 400 million tones. But this is 10 million tonnes below 2017 production levels.
Meanwhile, Chinese steel production has remained strong despite the high iron ore prices as the Chinese government tries to stimulate the economy to mitigate trade tensions.
“Ultimately, we believe the fate of the market will depend on China’s steel production. If it continues to remain at high levels, then there is little chance iron ore stocks will rebuild this year.
“If it rolls over and pulls back in the second half, either for demand or government shutdowns, there is a chance for some modest rebuilding of stocks.”