By Ulf Bergman
After an extensive slide, iron ore prices have found some support at an eighteen-month low. Iron ore with 63.5 per cent iron content for delivery in Tianjin is currently trading at 85 dollars per tonne, a level that was last seen in May 2020 when China embarked on its spectacular V-shaped post-pandemic recovery. The recent travails of the Chinese economy, with softening demand for steel from a sluggish real estate and property sector, and the curbs on the country’s steel production have received much of the blame for the bearish sentiment in the iron ore markets. The close link between the iron ore prices and the fortunes of the Chinese economy is a function of the country’s dominant position as an importer. According to data from Oceanbolt, since 2015, 69 per cent of all seaborne iron ore was destined for Chinese ports, and the share rose to 74 per cent during last year’s pandemic.
However, the headwinds for the Chinese economy are not the only reason for the retreating market prices. The global iron ore output has also been recovering in recent months. Australia and Brazil, the world’s two major producers, are now past much of the disruptions that helped propel prices to record levels during the second quarter. While Brazilian iron ore production is yet to match the levels seen before the Brumadinho dam collapse, mining giant Vale currently has an annual capacity of around 330 million tonnes. Quarterly production has been on the rise throughout the year, with the first two quarters registering year-on-year percentage growth in the low teens. The third quarter showed a modest year-on-year production growth at around one per cent, but the 89.4 million tonnes was still eighteen per cent above the preceding three months. For the year’s final quarter, the company has nevertheless indicated that output could weaken somewhat due to the falling prices.
Australian iron ore miners are generally bullish, with both Fortescue and BHP reporting strong production for FY2021. However, the optimism is not evenly shared, with Rio Tinto standing out from the crowd. The company is expecting its production to be, at best, in the bottom end of the 325-340 million tonnes guidance for the financial year.
The sixty per cent drop in iron ore prices in the last four months has effectively ended any notions of the commodity entering a super-cycle, which was widely promoted in the earlier parts of the year. In a recent report, Fitch revised its price projections for this year and next downwards. The company expects the average price for 2021 to be 155 dollars per tonne, down from 170 dollars. For next year, the target has been revised from 130 to 110 dollars per tonne. Beyond next year, there is little to suggest that iron ore will be able to regain its previous momentum, with Fitch anticipating prices to keep sliding and reaching 65 dollars per tonne by the middle of the decade. While softening demand contributes to the downward trend, the improving outlook for production is likely to see the market for iron ore oversupplied in the coming years.
From a shipping perspective, it is easy to get caught up in the bearish narrative surrounding iron ore. However, as previously highlighted in Ocean Analytics’ contributions, falling commodity prices are not necessarily bad news for the demand for seaborne transportation, with lower prices potentially triggering larger volumes shipped. It is also in line with current developments, as global seaborne volumes remain strong despite increasing headwinds in the largest export market.
Last month saw the largest ever volume of seaborne iron ore discharged in ports globally, according to cargo tracking data from Oceanbolt. The 146.5 million tonnes narrowly beat the previous record set in October last year. November is also showing robust volumes globally, with projected full-month imports only marginally below last month’s. However, the fact that November is a day shorter than October is the primary reason for the projection falling short of a new monthly record.
Despite the negative newsflow emitting from China, iron ore keeps flowing into the ports in the world’s second-largest economy. Last month saw volumes only second to October 2020 discharged in Chinese ports, and November looks set to match the 106 million tonnes offloaded despite the month being one day shorter.
In light of weakening steel demand from the beleaguered construction sector and curbs on steel production to ease pollution levels, iron ore inventories have been building up in many Chinese ports. Stockpiles are typically expected to start building during the winter in the Northern Hemisphere, as steel mills want to safeguard sufficient supplies ahead of the pick up in construction activities in the spring. However, the current port inventories are around ten per cent above what has been recorded at the point in recent years. Satellite data from Tathya.earth also shows a rapid recovery in inventories in China’s largest iron ore port, Caofeidian, following a drop during the third quarter.
The global economic recovery has shifted some of the focus away from China, with steel production recovering globally and adding to the worldwide appetite for iron ore. Nonetheless, given China’s dominant position as the world’s premier consumer of iron ore, the build-up of inventories could add to the bearish sentiment for the commodity. The Chinese steel mills are likely to hope for a resumption of economic stimulus after the Winter Olympics to reduce inventory levels.