Iron ore quickly became the most volatile raw material in the world
There isn’t much room for iron ore to rise anymore, said a Singapore-based futures trader with five years of experience in the market. China has started to tighten its credit and this indicates that commodity prices are expected to drop, the trader said, declining to be named due to company policy.
At the same time, Chinese steel mills continue to break records. Production hit a record high in May and reached 473 million tonnes for the year to date. It’s on track to surpass last year’s 1.05 billion tonne mark, which authorities promised would be a climax as China seeks to cut emissions from the sector highly polluting.
Supply is therefore struggling to catch up with demand.
Structural issues affecting China’s iron ore supply remain significant, said the head of a Shanghai-based investment firm affiliated with a western Chinese steel plant, who asked not to be appointed to discuss their company’s positions in the market.
He pointed to historically low stocks, insufficient shipments in recent weeks from major Australian and Brazilian suppliers, and the possibility of restrictions on domestic production after recent mining accidents.
In the short term at least, China appears to have decided that cutting commodity prices, including iron and steel, is its most pressing concern. To that end, Beijing has stepped up its campaign to bring commodity inflation under control in recent weeks, with particular emphasis on deterring speculation it accuses, at least publicly, of pushing prices up.
An irony of this policy is the important role that speculators play in reducing volatility by increasing liquidity in the futures markets, according to a recent note from Goldman. Simply put, more buyers and sellers mean price adjustments become less abrupt
While the political outlook for the iron and steel markets remains bleak, the northern hemisphere summer is a slow season for construction and manufacturing in China, which is expected to weigh on iron prices, a said Lu Ting, senior analyst at Shanghai Metals Market.
Longer term, China’s efforts to crush prices should find support for a turnaround in the business cycle as economic support measures are rolled back.
Demand for steel could moderate as “China pulls out of large-scale stimulus and seeks growth driven by domestic consumption,” said Richard Lu, senior analyst at CRU Group.
Alternative to scrap metal
And China continues to seek alternatives to its heavy reliance on mostly foreign iron ore by encouraging imports of scrap.
But none of these factors will necessarily lead to a collapse in iron ore prices, as lower steel production is expected to raise prices and improve mill margins, making the more efficient and less polluting grades of the ore more affordable. said Lu of SMM, who expects the benchmark prices to fluctuate between US $ 180 and US $ 210 per tonne over the next three months.
So once iron ore prices stabilize, they are likely to be in a historically higher range, especially given the weight of stimulus packages that are boosting demand elsewhere in the world.
“Looking ahead, we expect Chinese government policy to remain favorable to steel demand through 2021,” said Elizabeth Gaines, CEO of Fortescue Metals Group, the world’s fourth largest iron ore supplier. .
“We are also seeing economic indicators outside of China continue to improve, with steel production in the rest of the world increasing by around 11% year-on-year in the first four months of 2021 to reach the levels before Covid, ”she said. .