Why Is Iron Ore Defying Gravity?

Why s iron ore defying gravity? This is the question I was asked over the weekend. My answer? I don’t see it as defying gravity at all. Oscillating wildly, certainly, but defying gravity? No! The trend in my opinion is definitely consistent with gravity laws- down!

The benchmark of 62.5% fines increased to $81.2/tonne earlier this week, which is about a 2.9% jump in a day. Make no mistake, this is HUGE.

The main reason was due to the announcement by China’s Ministry of Environmental Protection to deploy teams nationwide to inspect whether the new environmental protection measures have been adhered to.

A similar trend was seen in the manganese market in late November. China’s Ministry inspected a large number of silicomanganese smelters resulting in panic buying and an upward price revision as whenever these things are enacted, there is no real communication as to how long it will last, how much capacity, if any, will be taken out the system or for how long.

So essentially you have a situation now whereby the fundamentals do not suggest that prices should be rising, but at the same time, these environmental inspections have been ongoing causing prices to swing wildly due to these two opposing forces. Basically the Chinese have become swing producers in the iron ore game and the question as to whether they will increase purchases from Brazil/ Australia et.al or whether they will continue to expand their own production remains uncertain. The latter would mean continued oversupply and downward price movements. Given what happened in other markets (silicomanganese, coal, ferrochrome, etc), I am of the opinion that the latter scenario will prevail.

Another ( lesser) reason for the rally is because Chinese Banks announced that they are set to lend a record amount for infrastructure this year to meet economic growth targets.  I do not believe that this is sufficient to keep iron ore prices high and in any event, if we start reading China’s Thirteenth Five Year Plan, which I am not going into right now, there is some infrastructure growth, but this pales in comparison to previous Plans. Furthermore there is a lot of outward focus on buying up foreign assets rather than development. Tier 3 and 4 cities have a lot of spare capacity at the moment which needs to be filled before we start seeing real investment that we witnessed in the past.

Then if we start looking at the fundamentals………

Chinese Iron ore stocks

Chinese steel output has been climbing, despite capacity cut backs. Latest output data shows production rose 5% to 66.29m tonnes in November. And the first 11 months of the year output climbed 1% to 738.94m tonnes- which is massive!

Now if you consider some of the  iron ore stocks at ports (See Chart) in China- they just sitting there! They not committed at all. So much bonded in warehouses as well. And that’s just iron ore- we not even talking about the steel stocks yet!

  • USA: Steel shipments rose less than 1% in October and first ten months f the year showed a decline of 1.2% y.o.y. This is despite the implementation of protectionist measures and the decline in Asian imports.
  • India: The Ministry of Transport is removing an embargo that prevents day movement/ transport of ore and steel from certain districts. At the same time, they are fixing a ceiling price on the freight charges. This should result in more supply able to come from India which is negative for ore prices. We are seeing India accelerate supply. If we consider that India exported 1m tonnes of iron ore pellets in November, this compares to 4.57m tonnes in the Indian Fiscal Year ( Their year starts in April). As such we can begin to understand India’s full monthly potential and the fact that to date, they have not exported even close to this potential.  In a nutshell,  local demand is lackluster, so they will try and send more and more material to China.
  • Zimbabwe: Finally giving out iron ore concessions trying to “capitalise” on the iron ore price that has moved from $38/tonne to $80/tonne.  Nkosi Sikelel’ iAfrika-always late to the party! Total Africa time! I’m not expecting that Zim will have any impact, but it’s just worth noting that more supply from Zim and others is actually possible.

We’ve seen iron ore prices very recently at half this figures. I don’t see any reason, why given the sheer volumes of stockpiles around the world, prices can’t reach $45-50/tonne by next year and I dare say even lower.

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