Will global iron ore prices rise further ?

The global 62% ferrous content iron ore fines price has conquered the $200/dmt CFR threshold on May 6, the first working day after China's Labour Day holiday, which had been an accumulation in force after a strong first quarter and the rally since April, benefiting from the robust steel demand both in China and the rest of the world, despite that global iron ore supplies have been steadily recovering from the impact of Vale's dam collapse in January 2019.

Most of the market sources, thus, are curious to know where the ceiling is for the iron ore price now that it has been refreshing its record high on the daily basis, or whether it will head south soon now that Mysteel SEADEX 62% Australian Fines, for example, had skyrocketed by $42.55/dmt since May 3 to $229.75/dmt as of May 10, or the highest since Mysteel commenced the assessment in January 4 January 2010.

In the first quarter of 2021, Mysteel SEADEX 62% Australian Fines ranged $149.55-177.9/dmt CFR Qingdao, or having approached a nearly 9.5-year high on March 4, and the strengthening continued into May so far. In tandem with the ever-rising prices, all the iron ore miners including the world's top four have been enthusiastically delivering their cargoes to their customers worldwide though China, undoubtedly has been the biggest buyer.

Over January-April, China's iron ore imports continued with the on-year surge since 2020 though at a lower speed of 6.7% on year to 382 million tonnes, with March's import volume at 102 million tonnes, though more supplies have by no means hindered the prices from surging, and we were at over $200/dmt CFR Qingdao for the fourth assessment day, according to Mysteel's record.

China's iron ore buying continues, global demand picks up

All the price surges so far this year, thus, has had more to do with China's exceptionally robust demand for iron ore in rhythm with the domestic steel demand and the domestic mills' consistently steady production even during the Chinese New Year (CNY) holiday over February 11-17, with the only exception being in North China's Hebei province where 23 local mills have been ordered to operate their steelmaking capacities at 50-70% until the end of this year since March 20.

Domestic steel price strengthening since late March on the demand and in response to the possible supply tightness with Tangshan's curbing has further incentivized the Chinese steel mills to maximize their output, and the country's pig iron output, thus, grew 8% on year to around 221 million tonnes for Q1, or even higher than two years ago.

Graph: China's monthly pig iron output over Mar 2018-Mar 2021

Source: NBS

China's high pig iron and steel output has come as no surprise, as the heavy government spending on the country's infrastructure development since 2020 to beat the adverse impact of COVID-19 has substantially boosted the steel consumption from the sector, and the momentum has continued into this year, market sources agreed.

Therefore, the big difference in 2021 against most of 2020 has been the strong recovery in the worldwide steel output since last October when the rest of the world other than China started posting an on-year growth and persisted so until March, according to the latest data from World Steel Association (WSA).

source: WSA

"In fact, overseas steel output and prices have been rebounding crazily fast in response to the wake-up in demand from the recoveries in manufacturing and inflation," an iron ore trader from Zhejiang of East China commented, and the other economies in the world have been gradually resuming their economic activities despite the ongoing battle against the virus and its variants, he added.

Seasonal low iron ore supply in Q1 a booster to prices

Despite the global iron ore miners' strong motivation to catch up with the all-of-sudden revival in demand, the room for shipment growths is limited, as Q1 of the calendar year is usually a low delivery season because of the wet weather both in Australia and Brazil.

By the end of March, the world's top four iron ore miners posted a 4.5% on-year gain in their total iron ore sales to about 245 million tonnes, but the volume was down 15% on quarter, a sharp contrast to the sharp rises in steel output worldwide.

World's top four miners' iron ore supply in Q1

Source: Vale, Rio Tinto, BHP, FMGNote: all on a 100% basis

Rising iron ore prices have also inspired the miners other than the top four to ramp up output including those in China that has a 10-15% market share, and iron ore concentrates output among China's 332 mining companies under Mysteel's survey, thus, surged 11.2% on year to 65.71 million tonnes in Q1, though being 5.6% lower on quarter, as Q1 is usually a low production season too in China with the scheduled maintenance and transportation inconvenience especially for the miners in North China.

"As of now, we still anticipate global iron ore supply to grow further this year, but the decisive factor for this year's iron ore prices lies in demand, just as Q1 illustrated, and iron ore supply, despite more on year, so far has not caught up with the growth in demand, and little surprise that the prices have been surging," an iron ore trader from Southeast China's Fujian province pointed out.

Besides, China's greater emphasis on pollution control and higher steel margins since March have propelled its domestic steel mills to consume medium- to higher-grade iron ore such as PB Fines, Newman Fines, and Carajas Fines, as well as the domestic iron ore concentrates with ferrous content at 64-66% on average for the highest productivity and efficiency, while the supply tightness of such products has also been factored in the 62% iron ore pricing index and their premiums against this most liquid pricing index.

Iron ore price hard to fall in near term? What about H2?

Meanwhile, the fundamentals seem to suggest further gains in iron ore prices in general, many market sources agreed on the projection.

"Demand, supply, high steel prices and macro-economic environment all point to a higher price, how to retreat?" an iron ore analyst from a Fujian-based futures company highlighted, adding, "the price are at a record high, but no one can be certain that now it has touched the ceiling."

The usually lower iron ore shipments in Q1 and also in April this year are unlikely for arrivals at China's ports to vary much in the near term, while "May is a peak season in China for the construction work, and with steel margins now at or above Yuan 1,000/tonne ($154/t), Chinese mills will stick to high steel output regardless of iron ore prices," he added.

As of May 10, China's national price of HRB400E 20mm dia reba has skyrocketed to Yuan 6,274/t including the 13% VAT, or the first time to be in the threshold of Yuan 6,000/t since Mysteel's launch of this assessment on March 3 2011, and rebar margins has been around Yuan 1,139/t including 13% VAT by the same day, according to Mysteel's assessment based on current steel and raw materials prices.

The Zhejiang iron ore trader also pointed out that steel demand has so far appeared rather promising not only in China but in the rest of the world. "We are rather confident that steel demand will not shrink in May, though it is hard to predict a longer term, as the market has been changing so fast," he said.

As for Beijing's reiteration on crude steel output cuts for this year, it may not necessarily lead to lower iron ore prices because of possibly lower demand, according to some market sources.

"The cuts, mainly about blast furnaces, will affect iron ore demand, but China's steel prices may be boosted on lower supply but higher demand, enabling iron ore prices to persist high, or soaring steel prices may well lead to less-than-expected steel output cuts, and iron ore price may benefit from better-than-expected demand in the end," a Beijing-based senior industrial analyst said.

That is exactly what has happened with Tangshan's curtailing local steel output since late March, and Beijing, thus, may need a thorough review and careful planning as to when the curbing measures should be implemented and by what degrees, or it may lead to undesired outcomes, he warned.

In the longer term, though, "iron ore price may subside in H2 if steel demand cools down then, while iron ore supply grows at a faster pace and steel mills cut down on output," a Shanghai-based analyst predicted, though he doubted drastic declines in iron ore price, "If the scenario is rather bad, the price may fall below $140/dmt CFR," he said.

A great uncertainty, of course, lies in whether Beijing may take some administrative measures to cool the overzealous iron ore market, as many official and non-government organizations such as the China Iron and Steel Association had been closely watching the price movement, proposing various means both in the short and long term on how to restore rationality and reasonableness in this core steelmaking raw material market.

Written by Victoria Zou, zyongjia@mysteel.com

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