LAUNCESTON, Australia- Just as iron ore’s surge to a record high in May was an overblown rally, its plunge last week was a disorderly retreat, with neither move fully justified by the fundamentals of supply and demand.
The price of spot iron ore for delivery to north China, as assessed by commodity price reporting agency Argus, slumped 22.2 percent from the previous week to end at $100.45 a ton on Sept. 17.
The steel-making ingredient has now fallen 57.4 percent from the record high of $235.55 a ton, reached on May 12.
While the rally that peaked in May was supported by fundamentals, and the recent decline likewise has solid drivers, the price moves have been excessive and are perhaps a sign of increased speculator interest in a market that traditionally was the preserve of large players, miners and steel mills.
The main factor behind the price slump has been moves by China, which buys about two-thirds of global seaborne iron ore, to cut steel output in the second half of 2021, in order to ensure that full-year production doesn’t exceed the record 1.065 billion tons from last year.
The authorities want to limit steel output in order to reduce pollution and energy use, especially given the surge in prices for power generation fuels, such as thermal coal and natural gas.
Iron ore supplies, meantime, have improved in recent months after the earlier weather disruptions in top exporter Australia and coronavirus outbreaks in number two shipper Brazil.
However, the movement in flows of iron ore around the world is nowhere near as dramatic as the moves in prices.
In the first eight months of the year China’s iron ore imports were 746.45 million tons, down 1.7 percent from the same period in 2020, according to customs data.
Imports in August were 97.49 million tons, the highest since April and a sign that supply is recovering.
September is likely to see even stronger imports, with Refinitiv vessel-tracking data estimating as much as 111 million tons will be landed this month, and commodity consultants Kpler being even more bullish with an estimate of 116.6 million.
So far, the higher import volumes aren’t driving a build-up of stockpiles, with port inventories monitored by consultants SteelHome dropping for a second week to end at 130.1 million tons for the seven days to Sept. 17.
This does put them above the 118.3 million tons for the same week in 2020, but the usual seasonal pattern for port inventories in China is they build heading into the northern winter, and draw down after the cold period as more construction activity resumes with the warmer weather.
On the supply side, exports from the top shippers may actually be a bit softer in September, with Kpler estimating Australia will ship 75.22 million tons, down from 76.01 million in August and 73.11 million in July. – Reuters
