Iron ore’s fortunes have changed for the better in the past few weeks. The commodity rallied for a third week and rose to its highest level in almost five months on lower port stockpiles in China and speculation that local production was contracting.
Ore of the benchmark-grade 62 per cent content delivered to Qingdao climbed 1.1 per cent last week in the longest weekly run since April, according to Metal Bulletin.
The commodity was down 2.1 per cent to US$62.91 a tonne yesterday after reaching $65.61 a tonne on June 11, the highest since January 23.
Iron ore went on a roller coaster ride this year, in which prices sank to a decade low in early April on rising low-cost supply from the top producers and concern that demand in China would falter as growth slowed. Tumbling stockpiles in the biggest buyer as imports missed expectations spurred back-to-back gains in April and last month, and prices extended the rally into this month.
“There’s been a significant destocking going on, and that would be why the iron ore price has been rising – seasonal factors and the fact that they are destocking,” said David Lennox, a resource analyst at Fat Prophets in Sydney. “There’s a lack of inventory in China.”
Carsten Menke, a commodity research analyst at Julius Baer, concurred.
“We believe the rally was primarily driven by two factors,” Mr Menke said. “First, Chinese iron ore demand picked up as the steel mills satisfied seasonally stronger demand from the construction sector. Property construction starts in China more than double between January and June, which is the seasonal peak. Second, shipments from Australia, the world’s largest iron ore exporter, were hampered by bad weather, which led to a slide in Chinese port inventories.”
Iron ore has gained 27 per cent this quarter and is set for the first such advance since the final three months of 2013. Its performance beat all constituents in the Bloomberg Commodity Index, which added 2.9 per cent in the period, led by West Texas Intermediate crude oil, petrol and Brent.
Holdings at ports in China fell 13 per cent to 85.4 million tonnes last month and extended the drop in the first week of this month to 83.8 million tonnes, according to Shanghai Steelhome Information Technology. That is the lowest since November 2013.
“Stockpiles have been lower quality,” said Mr Lennox. “So the 62 per cent iron has been basically just gobbled up as soon as it comes into the country.”
Port reserves may rise as some higher-cost mines restart, the China Iron & Steel Association said in a report on its website last week. Prices may fluctuate, as supply still exceeded demand amid declining steel output, it said.
According to ANZ, a rise in Baltic Capesize freight rates last month suggested increased shipments of iron ore delivered into Chinese ports this month.
The market will tighten in the second half as China imports more and mines less, said the Vale chief executive Murilo Ferreira. More Chinese miners than people realise have left, he said, predicting that in terms of steel “we will have a better second half in China”.
Mr Menke believes that the big miners are not following a strategy targeting price levels. “Instead, the aim is to maximise their market share by further expanding low-cost supplies, which could eventually push high-cost producers out of the market. The consolidation and concentration process within the industry has just started, with a number of smaller high-cost producers unable to survive.”
Ole Hansen, the head of commodity strategy at Saxo Bank, suggests that the big miners could, by introducing a group such as Opec, attempt to control and support the price of iron ore. “But recent action from the biggest producers such as Vale, BHP, Rio and Fortescue make such an initiative very unlikely. Instead they have all, again in similar fashion to some of the wealthy oil producers, been ramping up production, thereby pushing smaller and less cost-efficient producers to the brink”.
While prices rebounded this quarter, they remain about 29 per cent below their level 12 months ago after BHP Billiton, Rio Tinto Group and Brazil’s Vale boosted capacity, spurring concern that supplies would exceed demand. In many markets, recently installed low-cost supply can now be stretched to meet demand, the BHP chief executive Andrew Mackenzie said this month.
The rally will not last, as supplies will expand further. The advance is living on borrowed time, the Goldman analysts Christian Lelong and Amber Cai said.
ANZ is also sticking to its forecast that the factors that hurt prices in the first quarter will soon reassert themselves.
China’s steel demand will probably start to wane as hotter temperatures over this month and next month slow activity, ANZ said this week.
Steel consumption in China will shrink 4 per cent this year and a further 2 per cent next year, ANZ said last month, citing weakness in the property market, which accounts for about 40 per cent of demand. Asia’s largest economy grew in the first quarter at the slowest pace since 2009 amid the property slowdown.
Julius Baer also supports that view. “The iron ore market is set to remain oversupplied on growing supplies and more or less stagnant demand from Chinese steel mills,” said Mr Menke.
“A major recovery in property starts is unlikely in our view given the oversupply of existing property and falling property prices in most cities. There is little need for new property in many areas in China, even prompting the government to restrict land sales in areas suffering from oversupply. Demand for new property should structurally decline over the coming years as the speed of urbanisation slows. Taken together with the transformation of the Chinese economy from investment-led to consumption-led growth, we believe that per capita steel consumption may well be at or close to a peak,” he said.
The Swiss bank has a three-month price target of $50 per tonne and a 12-month price target of $45 per tonne.
ANZ, which has had a bearish view for quite some time, now predicts prices at $55 a tonne this year and $58 next year.
“With no sign of decreasing output from the big miners, only a pick-up in global demand and a continued reduction from smaller producers will ensure a lasting recovery in the price, something we on both accounts find unlikely to happen anytime soon,” said Saxo Bank’s Mr Hansen.
* ith additional reporting by The National