Iron ore: more than ever, it all depends on China

Iron ore China demand consumption steel 2020
Commonwealth Bank analysts note the current healthy high iron ore price is contingent on Chinese steel mill margins remaining positive.

Sky-high iron ore prices on one side, steel production in many countries down markedly — and it is China’s demand that is the lone factor keeping iron ore consumption going.

For the month of June, global steel production year-on-year was tanking: India down 23.9% on the same month in 2019, Brazil and Germany declining 18%, Japan dropping 16.8%, and Taiwan falling 13%.

China was the only one showing an increase year-on-year — up only 3.1%. But, because it accounts for 58% of global steel output, that was all that was needed to keep iron ore prices from sliding.

China also accounts for 70% of the world’s iron ore imports.

As of Friday’s close, iron ore was sitting at a very healthy US$128.50 a tonne.

China’s policy support remains the key upside risk for 2021, say the Commonwealth Bank’s commodities analyst Vivek Dhar and China economist Kevin Xie.

In the latest note, “Iron ore dances to China’s tune”, the analysts argue Chinese steel mills have managed to retain good margins, and can tolerate the high iron ore prices.

And that steel demand has been buoyed by the lift in infrastructure spending announced from Beijing, but also from the renewed strength of manufacturing activity in China.

“Another remarkable statistic to come out following the COVID-19 outbreak is that China became a net steel importer … in June for the first time in 11 years.”

“That’s entirely consistent with Chinese steel prices trading at a premium to steel prices elsewhere in the world,” the CBA note continues.

Good steel outlook for remainder of 2020

CBA claims the key uncertainty is how long China will keep supporting its commodity-intensive economy — which will be driven largely by Chinese Government policy support.

“And on that front, the overall outlook for the remainder of 2020 still looks good for China’s infrastructure and manufacturing sectors,” the report added.

Which, in turn, is bright for iron ore.

According to the analysts, it all comes down to “China’s iron ore demand impulse”.

China is the only country that, in the first six months of 2020, recorded positive steel demand growth.

Chinese steel mill margins the key for iron ore price

Even with global iron ore exporters diverting cargoes to China because of lacklustre demand elsewhere, markets are still tight.

But iron ore supply is slowing improving.

Following the disruptions caused by Vale’s dam collapse disaster in 2019, Brazil’s production is coming back gradually.

But Chinese steelmakers are wary of switching their iron ore blends to Brazil’s higher grade and lower alumina by-product because of reliability issues.

By contrast, Australia’s iron ore supply has been more reliable

But the key may be CBA’s expectations that the Chinese mills will be able to retain their comfortable margins — although the authors add that there is some trepidation.

In July 2019, when iron ore prices were last at these spot levels. Prices collapsed from a peak of US$126/t to a low of US$83/t in just 33 days.

“That collapse was triggered when China’s steel mill margins turned negative,” Mr Dhar and Mr Xie noted.

Join Small Caps News

Get notified of the latest news, events and stock alerts