China: The curious case iron ore demand drops but prices rise

Long-term prices of the steel-making raw material seen dipping below $100/t

Prices of iron ore, after falling to $94/tonne (t) in Sept’21, have rebounded steadily since late last month. The current price of Fe62% fines is around $125/t, which is about $30/t higher than the low of $94 seen on 21 Sept, an increase of more than 30% in less than three weeks. While prices are rising, China’s iron ore port inventories are climbing, and currently exceed 133 million tonnes (mn t). The current inventory on ships in Chinese ports is significantly higher compared to last year’s levels and the same period last year.

Why is there such a big increase in prices?

Increase in inventory means lower demand, so why are iron ore prices rebounding sharply?

• High freights: The import freight rate of iron ore has soared recently. The Baltic Index, which reflects the shipping price, reached 5526 on 8 Oct’21, which is 1116 higher than on 21 Sept’21. The long distance between Brazil and the relatively high freight rates easily impacts prices of iron ore. The freight from Brazil to China has risen very significantly. For example, on 8 October, the freight from Brazil’s Tubarao to China was $48.9/t against $36.66/t on 21 Sept’21, rising by $12/t in almost 20 days.
• Stocking ahead of holidays: Lange Steel Research Centre analysed that this is due to the recent intensive stocking by domestic steel mills. Before the one-week National Day holidays that began 1 October, steel mills had a need to stock up to adequately prepare the raw materials during the vacation period. After the holidays had ended, the mills had already consumed most of the iron ore inventory, and there was a need to replenish stocks post-holidays. Lange Steel Research found that steel mills in most areas are purchasing in a planned way after the holidays, which is making China experience a short-term release of demand for iron ore.

In fact, although the purchase volumes of steel mills have increased, the shipping volumes from overseas mines are also increasing. So, there will be a phenomenon of simultaneous increase in inventory and prices.

• Market speculation: Industry insiders believe that the sharp rebound in iron ore prices this time has also been brought about by market psychology and speculative factors. An industry insider said: “Recently, some foreign, high-cost mines will have some production shutdowns. This would mean supply tightness as prices fall. This also makes the market think iron falling below $100/t is a relatively low-price level. At this time, speculation sets in and prices are prone to rebounding.”

Outlook

However, many experts still believe the demand for iron ore in China will continue to decline for some more time, supply will be in excess, and there will be room for a certain drop in prices. The fourth quarter will continue to see reduction in crude steel output, and there will be firm efforts to meet the annual target.

Air pollution curbing measures in autumn and winter will be stronger, and range over a longer period. Thus, production of the steel industry is bound to be restricted. The strengthening of dual control of energy supply and consumption across cities will also impact the steel industry.

However, industry insiders feel that, 2-3 years down the line, as China’s steel demand reaches a plateau and supply of scrap increases, and new projects developed by overseas mines are put into production, there will be an oversupply situation in ore. Consequently, in the long run, prices of ore will definitely go below $100/t.