Could Spot Iron Ore Be On Track For $100/Ton?

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Includes: BDD, BOM, BOS, DBB, JJM, JJUB, RJZ, SLX, UBM
by: MetalMiner
Summary

Demand is at its seasonal peak as the weather warms in China and construction work begins in earnest, pushing up steel futures by more than 3% in early April.

Demand due to restocking is certainly up and optimism is spurred by expectations of increased infrastructure spending.

Crude steel output grew 9.2% to 149.6 million tons in the first two months of the year, 3.3% faster than the same period last year.

Original Post

By Stuart Burns

According to Reuters, spot 62% grade iron ore for delivery to China recently rose 1.6% to $93 per metric ton and the most-traded May 2019 iron ore contract on the Dalian Commodity Exchange soared as much as 4.1% to 710.5 yuan ($106) per ton - the highest for the Asian benchmark since 2013.

Such robust price performance was not a one-day spike, but was reflected across the week as the contract gained nearly 10% during the first week of April on a combination of strong steel mill buying and concerns over constrained supply from both Australia and Brazil.

Nor was the bullish sentiment confined to iron ore, as Reuters reported coking coal on Monday rose 1% to 1,258.5 yuan ($187.29) a ton, and coke rose 1.4% to 2,048.5 yuan ($304.86).

Demand is at its seasonal peak as the weather warms in China and construction work begins in earnest, pushing up steel futures by more than 3% in early April. According to Reuters, the most-active construction steel rebar contract on the Shanghai Futures Exchange recently rose as much as 3.6% to 3,710 yuan ($552) a ton, its highest since Aug. 22, while hot-rolled coil jumped as much as 3.4% to 3,955 yuan a ton ($588).

Such performance suggests the steel market is roaring in China, fueled by another infrastructure spending spree, but the reality is something different.

Demand due to restocking is certainly up and optimism is spurred by expectations of increased infrastructure spending.

But steel production may be getting ahead of itself.

According to the state-run news agency Xinhua, steel mill profits nearly halved in the first two months of 2019 from a year earlier, as the sector reported profits of 29.6 billion yuan (around U.S. $4.4 billion) in the January-February period. That total marks a decline of 49.5% year on year, according to the National Development and Reform Commission, the country's top economic planner.

The profit slump came as market supply continued to expand. Crude steel output grew 9.2% to 149.6 million tons in the first two months of the year, 3.3% faster than the same period last year. Meanwhile, rolled steel production increased 10.7% to 171.5 million tons, up 6.1% year on year.

Illustrating the stress the Chinese steel sector is under, steel exports surged 12.9% to reach 10.7 million tons, as mills sought markets for excess production and imports slid 9.9% to just 2 million tons.

Iron ore supply has been constrained, encouraging mills to overpay for material as they restock.

According to Reuters, iron ore shipments from Australia's Port Hedland terminal, the world's biggest iron ore port, fell more than 8% in March from a month earlier as a result of disruption from Tropical Cyclone Veronica in Western Australia.

Fears were stoked further by an announcement by Brazil's Vale of expected reduced sales volumes this year due to dam disasters leading to unplanned closure of mines.

Weather-related disruption, however, is temporary and steel demand will ease once restocking is fulfilled. Unless infrastructure spending surprises on the upside, current demand is not sufficient to drive steel prices and iron ore demand much higher.

Will the S&P Global Platts 62% Fe IODEX benchmark break through $100/dmt CFR North China this spring? Bulls would have us believe it is possible.

Iron ore has surprised on the upside, but the underlying fundamentals make such a proposition look doubtful. An easing of prices in Q2 and Q3 is more likely.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.