Iron Ore Prices Continue To Defy Gravity; Can They Keep Rising?

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Includes: BDD, BDG-OLD, BOM, BOS, DBB, HEVY, JJM, RJZ, UBM
by: MetalMiner

Original Post

By Stuart Burns

Anyone looking at the seaborne Asian iron ore market? A cursory glance at China's iron ore market, and one has to ask, "What's going on?"

Iron ore prices have been on a roller coaster this year, yet reports abound of excess iron ore supply, excess steel production, excess steel capacity and falling property prices and, by extension, excess appetite for construction steel.

This week, reports of rising port stocks, up 1.6% to 100.45 million metric tons, or five weeks of supply, should have depressed prices, but the prevailing mood among traders seems to be one of cautious optimism that iron ore consumption and, hence, steel production will continue strongly this year - so much so that iron ore prices actually rose 2.7% to $54.98 per mt late last week.

Outside China, many take the more pessimistic view espoused by Goldman Sachs that sooner or later, gravity will re-exert itself and prices must fall. The investment bank is predicting prices back to $40 later this year, but this quarter, the market has continued to confound many who cannot quite understand why it has remained so strong.

Iron Ore Prices Still Climbing

According to ship tracking services, iron ore shipments are continuing at an elevated level, but so is steel production. On a per day basis - the safest way of measuring monthly output - April's steel production in China was 2.21 mmt, exceeding that of March at 2.28 mmt.

An interesting sidebar is that the big three iron ore producers' policy over recent years of ramping up production to achieve economies of scale and cutting costs to survive in a low-price environment in order to drive higher-cost producers out of the market is finally having some effect. According to Reuters, Australia shipped 271.41 mmt of iron ore to China in the first five months of 2016, equivalent to a 66.9% market share of the total 405.364 mmt imported by China, well ahead of Brazil at 20.9% share.

Australia's 66.9% share for the January-May period is up on the 63.7% it achieved for the whole of last year, while Brazil's market share in the first five months has risen to 20.8%, up from 20.1% for 2015.

Together, Australia and Brazil accounted for 87.8% of China's iron ore imports in the first five months of the year, up from 83.8% in 2015 as supplies from elsewhere have been squeezed out.

Cracks in Steel?

For bears, the cracks in the iron ore and steel markets may be beginning to show this week, though. Steel and iron ore futures in China sank to their lowest since March on Monday, each tumbling nearly 6% at one stage, according to Reuters, while coking coal and coke slid 4%.

Steel prices have also fallen on exchanges in China this week, but it would be a brave soul who called this the start of a sustained fall in raw materials or finished steel prices. China has shown this year that it has the ability to surprise, and its speculators to take a path of their own choosing, regardless of what the rest of us think.