by Stuart Burns
Iron ore is in a bear market, according to Bloomberg, as prices have fallen to their lowest in five months amid a wave of negativity that has led Chinese traders and steel mills to sell down their stocks of the key steel ingredient.
The price of benchmark Australian iron ore with 62% iron content has fallen 12.5 percent in the past month. On Monday, it dropped to $123 a metric ton, the lowest since December, according to sources quoted in the paper. Perversely, daily steel production in early May rose to 2.19 million tons, on track for a monthly record, data from the China Iron Ore & Steel Association and the National Bureau of Statistics quoted in Bloomberg show; while at the same time, prices for finished steel continue to tumble.
Not surprisingly, the Baltic Dry Index is down as well, as shipping rates chase lower iron ore volumes. The index has fallen 27 percent from a year ago with Capesize vessels down to $5,000/day.
What does this all mean?
The Chinese steel industry appears to be have several dynamics operating at the same time. On the one hand steel, mills are de-stocking iron ore inventory, no doubt conscious of the fact that prices are falling and looking to move higher-cost stocks before prices fall further. In time, this will promote a restocking cycle when inventory levels reach sufficiently low levels and mills feel confident the market has bottomed.
However, most analysts remain surprised that finished steel production has remained so high when growth is slowing and construction remains depressed. Reports of steel mill cut-backs and closures may have more to do with power shortages (in provinces like Hebei) and routine maintenance than a response to poor sales or loss-making economics.
Yet the weakness in finished steel prices and record production numbers are trends that should run in opposite directions, and either production should slow or prices stabilize in the short to medium term, as demand is not expected to pick up significantly this year. Lower iron ore costs are helping steelmakers' squeezed margins, and the arrival of more capacity on the supply side later this year will not help iron ore producers reverse that trend even if steel mills enter a restocking cycle in H2.
Whether Bloomberg has it right in calling iron ore a bear market remains to be seen, but on balance, we can't see a lot of evidence to prove them wrong this summer.