Iron ore — the commodities sector’s runaway train
Propelling prices higher is China’s booming steel sector, declining stockpiles and Vale’s reduced iron ore production.
Iron ore at US$150 per tonne is now being talked about after the 62% fines price moved above US$145/t on Friday (and came just US$1/t short of that key threshold in Chinese futures trading).
It was the highest the commodity has been since 12 March 2013.
Even the low-grade product — 58% fines — reached a seven-year high, too, and is now standing at US$134/t.
Iron ore price in US$/t.
Three factors are at play.
One, China’s steel industry is booming with 90 million tonnes per month, over four months, being shipped from mills, signalling that China is back at work.
Two, there has been yet another decline in iron ore stockpiles at Chinese ports.
Stockpiles at 45 ports surveyed fell to a reported total of 1.6Mt last week.
This comes at a time when steel mills are looking to restock with iron ore and other inputs.
And three (certain to exacerbate the port stockpiles problem), Brazil’s Vale announced last week it had scrapped its iron ore output target for 2020.
Now, that figure is expected to come in lower.
Worse, the Brazilian company indicated things were not going to be all that much better in 2021.
Frenzy also in Chinese ore futures
It was that trifecta that had investors rushing for iron ore producer shares as the week ended.
Frenzy was also taking place on domestic Chinese exchanges where the contract price got as high as US$149/t.
One report out of China noted that the Dalian Commodity Exchange instructed its members that they should trade iron ore in “a rational and compliant manner”.
One statistic out today from the Commonwealth Bank of Australia’s Vivek Dhar is telling in terms of how well the Chinese economy has recovered.
China usually account for about 70% of global seaborne iron ore imports.
But in the first nine months of 2020, China’s take was 76%, no doubt reflecting its recovery while most developed country economies were (and still are) struggling with the impact of COVID-19.
China manufacturing soaring, boosting ore demand
In November, China’s purchasing managers’ index rose to 52.1 (50 being the mark separating growth from declining output).
This was much better than consensus forecasts.
Another regular survey, this time of export activity in China, hit a 10-year high of 54.9 in November.
As Mr Dhar points out, base metals and iron ore are the most leveraged to an industrial-led recovery in China.
China is continuing to invest heavily in infrastructure — three weeks ago, for example, it announced the building of a new 1,100km-long railway line from Sichuan province to Lhasa, Tibet.
Infrastructure accounts for as much as 25% of Chinese steel demand (manufacturing another 20%).
Such is the iron ore demand, two privately owned (but mothballed) iron ore mines in the Northern Territory are re-opening.
The Roper Bar mine resumed mining in early November while the Frances Creek mine, which has a history of on-again, off-again mining over several decades, will be back in business early in 2021.
But what about Australian iron ore?
Last week West Australian premier Mark McGowan expressed concern about the iron ore business being caught up in the Beijing-Canberra political standoff.
A China ban on Australian iron ore (similar to the one on barley, coal, wine, lobsters) would be devastating to his state, and to Australia as a whole.
But it is unlikely to happen in the short term.
While it is now being reported that China has turned to Canadian coal miners for supply after connections with cut with Australia, Beijing has no easy replacements for the Pilbara’s iron ore.
As noted, Brazilian output is struggling and progress in getting mines up and running in Africa (especially in Guinea) has been slow.
Moreover, Chinese state-owned Chinalco has a 14% stake in Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) has especially close ties with China.
The more immediate concern for Australia’s iron ore industry is how long China will maintain its fiscal stimulus.
When that tapers off (probably in the second half of next year), iron ore prices will no doubt feel some pain — although probably with still comfortable margins.