How will Chinese Iron Ore Prices Perform in Near Term?

A warning to suppliers, buyers and speculators in global iron ore: the price volatility you've witnessed in the world's largest iron ore market, China, in recent months will be a feature of your lives for some time to come. That's the view of numerous market sources canvassed across China by Mysteel Global this week who say the data suggests the wild ride for the commodity will continue, at least in the near term.

Iron ore prices in both the physical and futures markets in China have experienced drastic gyrations after the Chinese New Year holiday ended February 3. Inevitably, the pundits say the ongoing impact of the COVID-19 outbreak - first at home, then globally - is raising so much uncertainty regarding both iron ore supply and demand. And in fact, market players need only look at the roller coaster ride in iron ore prices again over the past few days to realize that relative stability is some way off.

In the physical market, Mysteel's SEADEX 62% Fe Australian iron ore fines, for example, first slid to $81.7/dmt CFR Qingdao on April 7 - a new low since March 23 - and then quickly recovered in the subsequent two days to $84.55/dmt on April 9. Similarly, Mysteel's PORTDEX 62% Fe Australian iron ore fines also rebounded over the past two days to Yuan 664/wmt FOT Qingdao and including 13% VAT on April 9, up from Yuan 639/wmt on April 7 - then also a low since March 23.

The see-sawing price trend was more obvious in iron ore futures market. The most-traded iron ore futures contract on China's Dalian Commodity Exchange (DCE) for September delivery first plunged to as low as Yuan 542/dmt on April 2, a low since February 4, before gradually U-turning over the next several days to end the daytime session on April 9 at Yuan 597.6/dmt.

"It is still very hard to predict iron ore price trends for now, as market sentiment is oscillating between bearishness and bullishness very quickly, and advocates of both views can't be confident they'll be proven right. Thus, the price will continue fluctuating largely for the near future," a Fujian-based iron ore trader commented.

The trader recalled that before the latest rebound, market investors, especially those speculators dabbling in the futures market, felt rather bearish about overseas iron ore supplies possibly being redirected from other countries to China longer term if the spread of COVID-19 worldwide takes much longer to be controlled. The fear was that an explosion of infections would further disrupt overseas steel consuming and steelmaking industrial activities including blast furnace operations, further paring back overseas iron ore demand, with miners redirecting their sales energy towards Chinese customers.

"Meanwhile, the softening domestic steel prices in China amid worries about steel demand and the erosion in prices of steel scrap - the alternative to iron ore for steelmaking - were also dampening market sentiment in both the futures and spot markets," he explained.

Globally as of April 9, the total of confirmed COVID-19 cases had reached 1,436,198 with many regions worldwide impacted. Thus, major steel producers around the world including those in Germany, Italy, India, Japan, the United States as well as Brazil have announced more production cuts in order to cope with the decline in steel demand, Mysteel Global noted.

In China meanwhile, the signals aren't that positive either. Mysteel's data shows that the national average HRB400 20mm dia rebar benchmark price, for example, had averaged Yuan 3,628/MT including 13% VAT in March, lower by around Yuan 94/MT on month, and as of April 9, the price had dropped to Yuan 3,600/MT.

At the same time, as of April 8 the price of 6-8mm common-grade carbon steel scrap in Zhangjiagang had hit a near 24-month low to reach Yuan 2,020/MT excluding the 13% VAT, off by a total of Yuan 200/MT from that on March 31.

"However, the iron ore market seems to dislike laboring under constant bearish sentiment, especially when the current spot market performance of iron ore market is yet to show some evident signs of weakness," he added. "You can see these days that many integrated blast furnace steelmakers are still maintaining production, procuring the necessary iron ore, and delivering tonnages from port to their works in time," he remarked.

The blast furnace capacity utilization rate among the 247 Chinese steel mills under Mysteel's weekly survey, for example, continued to rise over April 3-9 to refresh a near 2.5-month high of 78.81% as of April 9, or up 1.01 percentage point on week.

Over the first three days of this week, the daily trading volume of imported iron ore port inventories among the 52 surveyed ore traders across China averaged 1.37 MnT/day, still at a relatively high level, according to Mysteel's data.

"Besides, the central government is doing everything it can do to support the country's economy and return some normalcy to industrial activities, adopting measures such providing taxation relief, subsidizing rentals and injecting funding via various means such as government bonds," the trader remarked. "These moves by Beijing also represent good news for the iron ore market to some extent."

An iron ore analyst with a Shanghai-based futures company agreed that it was difficult to make any projection regarding the direction of iron ore prices now. "Though we have many indicators for future iron ore supply and demand, for all of them we need to await some definite signals. For example, we need to see overseas iron ore shipments to China increase for a number of weeks, or downstream steel consumption showing no more increase that would explicitly weigh on steelmakers' production. Failing these signs emerging, it may be all about fluctuation and finding direction," he said.

For the time being, the frequent swings in iron ore prices are making ore procurement rather a headache for many steelmakers.

"Cost accounting becomes harder for us amid the persistent price fluctuation - when good news and bad news arise too frequently and easily ripple market sentiment. Sometimes, the prices even increase in the morning and yet drop in the afternoon, if some news appears that triggers a sharp turn in market sentiment," an iron ore procurement official with a Shaanxi-based steel mill in Northeast China complained.

"Whether the market is trending upwards or trending downwards, you are still able to calculate the margin of loss or gain approximately and you can do some adjustments on your procurement schedule. But now, you need to be very cautious on procurement. That is why many steel mills are keeping relatively low levels of internal iron ore stocks, they are controlling their procurement pace, and stocking volumes strictly according to their short-term production plans," he explained.

But he insisted that steel demand was the core point that finally decides the steel mills' production and thus, raw materials prices.