By Ulf Bergman
Iron ore prices are continuing their volatile journey. November saw the steel-making ingredient recovering from an eighteen-month low and rallying almost twenty per cent during the last three weeks of the month. While prices are a far cry from the high recorded in early May, the recent recovery has been driven by expectations of higher steel output in China during the final month of the year, as reduction targets have been met. Hence, steel mills are expected to start restocking depleted stockpiles. Additionally, there are signs of improvement in the country’s beleaguered real estate sector, as looser mortgage restrictions are supporting demand, which is likely to fuel a rebound in the appetite for steel products.
Iron Ore – 63.5% (USD/tonne)
At the same time, as a rebound in Chinese demand offers some support, the Brazilian mining giant Vale is providing support from the supply side to the iron ore prices. This year, the world’s second-largest iron ore miner expects output to be at the low end of the previous guidance of 315-335 million tonnes. While the company is expecting the production to grow next year, the increase, projected to be in the 320-335 million tonnes range, is relatively modest and well below analysts’ expectations at 346 million tonnes. The falling iron ore prices have led to the company emphasising the production of higher-quality ores, with a lower output of low-margin and low-quality raw materials envisaged in the current price environment.
At the same time, as prices recovered some lost ground, global seaborne import volumes declined during November compared to the previous month. According to cargo tracking data from Oceanbolt, 131 million tonnes of iron ore were discharged in ports globally last month, some eleven per cent below October’s levels. Despite an extensive drop in imports, on a month-on-month basis, the volumes shipped in November were broadly in line with what is usually recorded during the penultimate month of the year. While four per cent below the same month last year, global imports were at par with pre-pandemic levels. However, the declining imports were not just a result of softening global demand. During the previous two months, adverse weather conditions in Brazil have seen the country’s exports decline by several million tonnes.
In recent months, the weaker Chinese demand for iron ore has been widely seen as the driving factor behind the declining prices. However, the drop has been proportionally smaller than for the rest of the world. Chinese imports fell by eight per cent month-on-month in November compared to the eleven per cent globally, according to data from Oceanbolt. The relative outperformance has pushed the country’s share of the market for seaborne iron ore to 74 per cent in November and just above the average for the last two years.
With Chinese steel production under pressure in recent months, port side inventories of iron have been building up. Stockpiles in one of the largest Chinese iron ore ports, Caofeidian, are at the highest levels since the middle of July, according to satellite data from Tathya. However, more forward-looking export data suggest that volumes heading for Chinese ports declined considerably during November, and inventories may decrease if the steel mills ramp up their production as expected.
The upcoming Winter Olympics in China will likely serve as a watershed for iron ore demand and prices. Beijing’s clampdown on the country’s steel production has to a great extent been due to the leadership’s desire to present the games with clear blue skies, as the industry is one of China’s largest polluters. However, the flagging Chinese growth could see the authorities altering the stance once the athletes and visitors have returned to their home countries. While the property sector is currently showing some signs of a recovery, it is likely to continue to weigh on Chinese economic sentiments and remain one of the headwinds for the coming year. In addition, the emergence of a new and more contagious variant of the coronavirus may disrupt the global recovery and reduce demand for Chinese exports. Beijing’s zero-stance on Covid-infections could also lead to new challenges for the already fragile domestic economy, with fresh local lockdowns and travel restrictions.
Many economists are expecting Chinese growth to slow next year, with many forecasts in the range of four to six per cent. Hence, there is a growing consensus that Chinese authorities will boost fiscal and monetary stimulus programmes to safeguard domestic stability next year. The Chinese central bank has also signalled an easing bias, while the State Council, China’s cabinet, has urged local governments to boost their spending. A return to stimulus-driven growth in China is likely to favour investments in infrastructure projects, which would see a recovery in domestic steel demand. Once the Olympics, and the need to control emission levels, are consigned to the history books, steel production is likely to be allowed to grow.