China: Why iron ore prices rebounded despite drop in demand, rising port inventory

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 112* 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.