Understanding the key drivers behind China's iron ore prices

In previous years, the rise in ferrous prices during off-seasons was primarily driven by policies stimulating demand for the next peak season. However, in today's real estate landscape, market sensitivity to policies has notably diminished. To envision boosting production further, policies must either surpass expectations or genuinely enhance micro demand.

The dynamic between supply and demand alone isn't compelling steel mills to passively curtail production. Presently, with marginal profits, minimal inventory pressure on steel mills, and robust resilience in sheet steel orders (including exports), there's little inclination for steel mills to proactively scale back production. A clear indicator of this is the marked surge in spot iron ore transactions over the past fortnight, with port offtake volumes maintaining their highest levels since the Spring Festival.

Consequently, iron ore prices are confined to a narrow range of fluctuations. In the absence of a driving force, valuation levels become pivotal to trade. Two reference standards emerge: firstly, using the upper and lower margins of steel prices as benchmarks for iron ore price fluctuations - anchored by the lowest EAF production cost of rebar; secondly, the cost line support of iron ore itself, hovering around a certain range, signalling buying value for specific contracts when reached. Inter-month spreads and bases predominantly exhibit narrow fluctuations, currently lacking significant trading opportunities. While recent market conditions and spot stock support have led to a notable expansion in basis, further production increase reluctance will inevitably dampen steel mills' purchasing enthusiasm to some extent.

Moreover, there's an anticipation of continued expansion in the medium to long term of the price disparity between high and low-grade products. This is primarily attributed to improved average profits of steel mills in the first half of this year compared to the latter half of last year, alongside reports of equipment damage caused by extensive use of low-grade ore last year, leading to decreased acceptance of such ore. Additionally, the impetus for energy-saving and carbon reduction policies necessitates steel mills to elevate the grade of their sintering products, further driving this differentiation.

Note: This article has been written in accordance with an article exchange agreement between Horizon insights and BigMint.