Iron ore prices are down by 9.8% over a month ago and are back at levels last seen in end-July. The main input used to make steel closed last week at $55.97/tonne (62% iron content grade, delivered at Qingdao port), according to Bloomberg. The sustained decline has revived fears that the price could go below $50/tonne levels.
What is causing this decline? China is the main draw for seaborne iron ore trade. A 15 September Bloomberg news report, quoting analysts, attributes the decline to fears of rising supply.
Last weekend brought news that Vale SA has got approval for a rail link at its S11D iron ore project in Brazil, due to start operations in January 2017. This project will add 90 million tonnes (mt) at full capacity, although initial constraints will limit it at 75 mt for the first few years, reported Bloomberg. However, another large new project that has started up, the Roy Hill project in Australia, will reach full capacity in early 2017, earlier than planned.
These capacity additions were known events, although the advancement of the Roy Hill ramp-up may be a surprise. Despite more supply, the uptrend in China’s steel production may explain why iron ore prices have recovered from the start of 2016, although they fell from the highs of $70/tonne. China’s steel production has remained resilient despite global calls to cut output and its own assurances to do so. In July, its output rose by 2.6% over a year ago, according to the World Steel Association, and while August data is not out, a Reuters report said it rose by 3%.
However, September also saw more pressure on China at the G-20 to participate in a global move to reduce overcapacity in steel. A recent move to ask all industrial units in Tangshan (a major steel-producing hub) to cut output has led to the expectation that China’s steel output may get hit. Similar moves have happened in the past too, with no material impact on China’s steel output.
That’s why the large miners remain confident. In a recent presentation, Vale estimates a steady increase in total iron ore availability (seaborne trade plus Chinese domestic output), from 1.61 billion tonnes in 2016 to 1.73 billion tonnes in 2018 and then tapering off to 1.74 billion tonnes in 2020. But it also expects crude steel output to increase, with China’s crude steel production improving.
Perhaps, the fall in iron ore prices is a mere blip. The new supply could also cause momentary disruptions in price trends before it stabilizes. The real fear is if China’s crude steel output sees a sustained slowdown or declines, that can hit iron ore prices hard. That may signal lower steel prices as well, as buyers will demand price cuts. Back home, that’s a situation that can harm both iron ore miners and steel producers.
SOurce::Livemint.com