The seaborne iron ore prices have witnessed an increase at USD 92/MT, CFR China which is at 29 months high.
The benchmark index (Dalian Commodity Exchange) also rose by 5% and currently at 712 Yuan (USD 103/MT). On similar lines, Shanghai rebar futures also rose.
There are mixed sentiments in the market. Few market participants believed that with onset of construction activities in China, there will be decent demand of iron ore and market will be bullish. On the other side, few market participants inferred that, these fundamentals will not affect prices.
In addition, recent report shows that RIO Tinto’s CFO said that global iron ore prices may not fall in the coming months .
Overall, global market is strong on the backdrop of strong global economy. Various metal producing countries have recently seen a strong currency such as Australia, Canada, Brazil, Russia etc. Not only iron ore, whole metal market is currently strong.
Factors leading to rise in iron ore prices
1. Declining crude iron ore production: China’s crude iron ore production have shown a consistent fall in the past 2 years.
In 2016, the country has produced 1,298 MnT iron ore against 1,370 MnT in 2015. In 2016, country’s iron ore production had reduced by around 80 MnT, Since, China also produced low grade ore and demand is higher for high grade iron ore as the production difference considered will come around half of the total difference i.e. 40 MnT.
China’s mines largely produce low iron-content ores and the government supply-side has forced many of these factories to shut down. As a result, higher demand for imported ores from domestic steel mills has created the surge in iron ore prices since late last year.
2. Surge in coking coal index: Chinese coking coal prices are currently on higher side. Chinese buyers prefer using high grade iron ore over low grade ore to reduce the usage of expensive coking coal.
3. Low-grade iron ore still not preferable for Chinese buyers: As we have reported earlier, low grade iron ore still not attracting Chinese buyer’s and also selling at higher discount rates. Currently, low grade Indian fines are selling at a discount of around 35-37% against index price.
Chinese steelmakers seek to raise efficiency and cut pollution that made them to prefer high grade raw material.
4. Rising steel prices supported iron ore prices: Chinese steel prices are rising on the back of rising demand in China. Surge in steel prices have supported iron ore prices to move up.
5. Donald Trump winning US presidency lifted gain in prices: Higher infrastructure spending under President Donald Trump and faster approvals for projects in the U.S. added fuel to the iron ore index since 2-3 months.
Factors which may not lead to increase in iron ore prices
1. Increase Chinese iron ore imports: It is to be noted that China’s iron ore imports have shown a tremendous growth since last 2 years. In 2016, the country had imported 1 BnT iron ore, which was recorded highest. In addition, in Jan’17, the country imported around 92 MnT iron ore against 88 MnT in Dec’16.
Rising imports have shown that Chinese mills are relying more on imports
from Australia and Brazil.
2. Rising supplies from Australia and Brazil: Brazilian Vale’s 90 MnT project S11D is on process to come inline in 2017. Australia’s Roy Hill project already started shipping ore. This has led to constant increase in supply of iron ore.
3. Rising Chinese iron ore port inventories: Chinese iron ore port inventories have shown a decent growth in past 1 year. Currently, last week inventories were at 126.9 MnT against 123 MnT previous week.
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