China's COVID lockdowns to decide iron ore prices

Iron ore price movements will largely depend on when lockdowns in China as part of Beijing's response to the COVID-19 outbreak are eased, Ian Roper, commodity strategist of Astris Advisory Japan KK, told delegates attending the Singapore Iron Ore Forum on May 17.

"The key is when China will come out of the COVID-zero policy and when the lockdowns will end. When that happens, pent-up steel demand comes back, iron ore consumption surges, (and) no doubt iron ore prices will be up sharply. But the big question now is when, of course," he remarked, saying that until that becomes clear, the market may just continue to see lower and lower ore prices.

Iron ore prices traditionally do well when steel prices are rising, Roper noted, saying this is something he expects to see in China once pandemic controls start to ease and activity resumes. Additionally, many steel mills have drawn down their ore inventory to low levels, and domestic iron ore supply has also been disrupted, meaning that mills should be eager to chase more imports to restock.

However, the timing of China's lifting of COVID controls will be key for iron ore prices. The longer that the controls remain in place, the more iron ore inventory could build in ports and in ships in port queues as seaborne supply starts to recover seasonally, Roper warned. Should this inventory expand too much, it is possible that Chinese steel prices will enjoy a strong rally, but iron ore prices are unlikely to follow, he argued, as mills will see sufficient iron ore supply flowing from the ports.

Currently, Chinese iron ore prices have gradually fluctuated down, with Mysteel SEADEX 62% Australian Fines, for example, reaching as low as $127.2/dmt CFR Qingdao on May 12 - the index's lowest since January 18.

On the other hand, the iron ore market itself is actually quite tight market this year, Roper pointed out. Moreover, seaborne iron ore supply looks set to decline again this year, he predicted.

Roper calculated that as much as 65 million tonnes of iron ore supply from Russia and Ukraine has been disrupted by the ongoing conflict. Even if a peaceful resolution can be found, there is likely to be some delay in resuming shipments - depending on the extent to which infrastructure has been damaged.

Consequently, if it's assumed that Black Sea iron ore exports are down 30 million tonnes, and accounting for losses already this year in Australia and Brazil, then global seaborne iron ore exports look set to be lower year on year, Roper told delegates. European seaborne iron ore imports meanwhile will have to rise to offset the loss of supply by rail from Ukraine and Russia.

In total, ex-China seaborne iron ore demand should grow strongly, but supply will be down, and this will be very positive for ferrous scrap prices globally.

"So, the iron ore market is certainly struggling on the supply side (and) that is normally an environment when we see very elevated iron ore prices. But for now, the (iron ore) demand is poor in China, which is pushing (ore) prices lower and lower," he said. Once demand moves up, the lack of supply will be an issue, and ore prices might go straight up again to reach some of the highs witnessed previously, he suggested.

China's iron ore imports in 2021 totalled 1.12 billion tonnes, down 3.9% from the new record of 1.17 billion tonnes reached in 2020, as Mysteel Global reported. Over this year's January-April period, imports fell by 7.1% on year to 354.4 million tonnes, according to data released by the country's General Administration of Customs.

Written by Victoria Zou, zyongjia@mysteel.com

This article has been published under an article exchange agreement between Mysteel Global and SteelMint.