China: Winter restocking may offer limited support to iron ore prices

• Most steelmakers show limited appetite for restocking
  
  
• Caution about steel market recovery keeps demand low
  
  

Mysteel Global: Although some Chinese steelmakers have already started accumulating iron ore to ensure they have sufficient feeds for steel production during the coming winter, buying interest among them is expected to be weaker this year. This signals limited momentum for iron ore prices in the months ahead, a new Mysteel report on the commodity cautions.

At this time each year, mills in China commonly start building up their in-plant stocks of steelmaking raw materials ahead of winter to avoid transportation disruptions caused by cold weather. The inventory build-up tends to begin in late September and lasts 3-4 months into the new year.

Meanwhile, the final quarter of the year sees seasonal declines in the production of domestic iron ore concentrates. This makes mills more reliant on imported iron ore and necessitates their bulk purchases of the material.

Archive data from Mysteel's regular survey of the 247 Chinese blast-furnace mills under its tracking showed that for each of the past three years, steelmakers' inventories of imported iron ore had begun mounting from late November and peaked just before China's Spring Festival holiday, which usually commences in late January or early February.

Mills' firm demand for iron ore during their months-long winter stockpiling activity usually underpins ore prices, despite steel consumption turning sluggish with winter's arrival.

For example, the monthly average price of Mysteel SEADEX 62% Australian Fines CFR Qingdao sat at $135/dmt in January 2024, higher by 3.7% than the average price in November 2023, according to Mysteel's assessment.

However, the increase in imported iron ore prices during the winter stockpiling period has weakened during the past few years. The rises for the same index as of January compared with the prior September were 32.3% in 2023 and 37.9% in 2022, Mysteel's assessment showed.

The main explanation for the slower rises was the fading sense of urgency among mills for restocking in recent years, in response to their shrinking steel margins. Since late September 2022, for example, domestic steelmakers have been generally suffering losses from selling rebars due to the beleaguered property sector.

"The economic stimulus policies introduced in late September this year had bolstered steel prices and brought some profits for mills on rebar sales, but the boost was short-lived," a market watcher based in Shanghai said.

Under the financial strains, so far this season, most mills have shown only limited appetite for ore replenishment, an ambivalence that is being compounded by guarded confidence in a steel market recovery in the coming year.

Some steelmakers in Southeast China's Sichuan province said that instead of procuring imported iron ore in bulk to support their winter production, they would rather keep modest stocks of ore and purchase from local traders when necessary, Mysteel's survey found.

In sum, winter stockpiling by mills this year will probably bolster the prices of imported iron ore as is often the case, but the gains are likely to be capped.

Note: This article has been written in accordance with a content exchange agreement between Mysteel Global and BigMint.