The COVID-19 pandemic may have triggered uncertainty over the prospects of the global economy for the better part of 2020, but a close look at iron ore prices across the world showcases a different story.
The disconnect between the economic prospects and the euphoric iron prices is so stark that even investors have begun to worry.
Iron Ore Prices Rose To $130 Per Tn On Tuesday, Its Highest Level Since 2014, As China’s Government Assured Stimulus For Infrastructure Building, Boosting Prices Of The Commodity Even Amid A Global Pandemic.
“We consider the recent price increase to be exaggerated,” said Daniel Briesemann, an industrial metal analyst at Commerzbank AG. “The current high price level would only be justified in an extremely tight market, which in our opinion does not exist in this form.”
Iron ore prices rose to $130 per tn on Tuesday, its highest level since 2014, as China’s government assured stimulus for infrastructure building, boosting prices of the commodity even amid a global pandemic.
“We expect significantly lower iron ore prices in the coming months,” he added. “However, due to the still upbeat market sentiment and the current high prices, we feel obliged to revise our previous low forecast upwards. At the end of the year, we now expect iron ore price of $100 per tn.”
This is $20 per tn higher than the forecast made in July.
The German bank sees iron ore price at $90 per tn in Jan-Mar 2021.
Prices of the ore have been above the psychologically crucial mark of $100 per tn since June due to disruption in supply from Brazil’s Vale, the world’s largest exporter. Currently, the September futures contract of iron ore is trading at $117.7 per tn on the Singapore Exchange and the most active January Futures contract of iron ore on the Dalian Commodity Exchange at 821 yuan per tn ($119.41).
Since the beginning of the year, iron ore has become costlier by almost 36% in Singapore and 40% in China.
But with supply from Brazil beginning to stabilise and an already oversupplied stockpile of iron ore in China, market observers fear that the rise may not sustain for long.
“Chinese steel production grew by 2.8% on year in the Jan-Jul period, whereas iron ore imports grew by a sharper 11.8% on year,” said Ritabrata Ghosh, the assistant vice-president and associate head of ICRA Ltd. “This indicates strong restocking demand by mills which at some point should taper off.”
He sees seaborne iron ore prices consequently moderating to $80 per tn by the end of the year.
Supply from Brazil’s largest producer Vale is seen increasing significantly in the second half of the year. Vale already has been returning to its pre-COVID level operation as exports have hit 33.4 mln tn in July, up nearly 60% from May when coronavirus infection prompted the mine to suspend its operations. Australian iron ore exports have also surged, with June exports hitting 81.3 mln tn.
The loadings for August suggest there’s plenty more to come, and a sharp price correction can only be averted if China’s central government releases more stimulus, said Daniel Hynes and Soni Kumari, Commodity Strategists at ANZ Research.
Both Brazilian and Australian producers are planning to export a record iron ore this year while China has been banking on its infrastructure demand to revive its economy suffering the aftermaths of COVID-19.
This may collectively raise prospects of prices coming under pressure in 2021 as steel output and demand remain weak in almost every market other than China.
Morgan Stanley in July had said that the rally in iron ore prices has been driven mostly by speculation and that it could set for a significant price decline similar to that in 2019 when iron ore prices shot up to $120 per tn in July, and later witnessed a freefall from August and reached to $86 per tn.
Since the beginning of this year, Chinese steel production totalled 593 mln tn. The country has imported a record 113 mln tn of iron ore in July itself, according to China’s National Bureau of Statistics.
According to market analysts, Chinese traders acted opportunistically and took advantage of the low prices when they hovered between $80-$90 per tn to make extensive purchases. However, there is a gap of two to three months between placing an import order and shipment arriving and augmenting supply in the market.
“Significantly more supply is coming to the market again. Chinese steel production, on the other hand, is likely to reach a plateau in the foreseeable future, so that the demand for iron ore should slow down,” Briesemann added.
Industry experts say more steel scrap needs to be used for steel production in the future for environmental reasons. Steelmakers are planning to produce steel through scraps that are used in the electric arc furnace process. Iron ore is mainly used in the blast furnace process of steel making.
Procurement of more iron ore is also inviting concern for China. London-based brokerage Marex Spectron points that arrivals at ports are unable to make way into the city due to heavy rains and COVID-19 restrictions, thereby, resulting in a tight physical market in the country.
Marex Spectron also sees current prices cooling off in the near term as some mills are holding back from chasing prices.
According to vessel-tracking data compiled by Refinitiv, iron ore vessels awaiting discharge at Chinese ports were carrying a combined 17.46 mln tn of iron ore as of mid August. China’s Iron and Steel Association plans to ease discharging difficulties and port congestion issues by the end of this month once weather condition improves.
For India as well, plans of more exports to China may need some reconsideration once global iron ore prices come under pressure. According to China’s customs data, iron ore imports from India more than doubled to 20 mln tn in Jan-Jun this year.
Given the expected price correction in the coming months, ICRA’s Ritabrata Ghosh feels that exporting higher grade iron ore from India may not be an economically viable option, however, lower grade iron ore exports should continue.