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Price volatility will continue to mark iron ore trade

The way prices of the world’s second largest seaborne traded commodity, iron ore, behaved during the just ended year will make everyone concerned wary about the 2022 demand and price forecasts for the commodity by global research agencies. Indian iron ore producers take the pricing cue from the global market and therefore, steelmakers here stay ready to embrace price swings.

Much to the surprise of miners and trade officials, iron ore prices in 2020 yo-yoed from an all-time high of $235.55 a tonne on May 12 to slide to 16-month low of about $85 in November and finally to end the year on China’s Dalian commodity exchange at $106.71 for May delivery. Such a roller coaster ride of the steelmaking ingredient was in the first place fuelled by expectation of a strong demand recovery in steel riding principally on infrastructure building in the post global Covid-19 second wave and then a few months thereafter by the Beijing edict that the steel industry must curb emissions resulting in production control. At the end, the commodity lost close to 30% over January 2021 opening price.

Indian miners closely watch all developments relating to iron ore imports and the more recent steel production discipline in China, which buys more than 80% of its ore requirements from foreign countries, mainly from Australia and Brazil, to have a fair idea of price movements. Globally, some 1.5 billion tonne (bt) of the mineral find their way to importing countries but majorly to China by sea.

No wonder then, monthly Chinese imports and port inventories there at any point will generally leave an impact on iron ore prices. For example, ore prices started falling in the second half of last year coinciding with Chinese imports declining 9.6% between June and November from the same period in 2019. Prices at Dalian were down as much as 42% in these six months.

That India more or less follows the global trend is confirmed by periodic ore price revision by the local industry’s bellwether NMDC, whose annual production of around 36 million tonne (mt) makes it the country’s largest miner. As world prices fell, NMDC on more than one occasion lowered its prices. As recently as December 28, NMDC price for lump ore with iron (fe) content of 65.5% was 4,900 a tonne and that for 64% fe fines was4,060, excluding the levies. While such price lowering help steelmakers to offset to some extent the high cost of coking coal, some of them are heard complaining that locally mined iron ore still commands a premium over global prices.

As the New Year has begun, one thing is certain that price volatility will continue to mark iron ore trade. And one single price influencing factor will be Chinese steel production and use behaviour, particularly in construction and realty sectors.

According to the World Steel Association (WSA), China’s steel production fell as much as 22% year on year to 69.3 mt in November and the January-November cumulative production was down 2.6% to 946.4 mt. The WSA will make available the December production figure in the third week of this month. Whatever that turns out, China’s steel output in 2021 would be less than the record 1.065 bt in 2020. This besides, the harsh winter and compulsion to keep the environment clean for hosting the Winter Olympics in February will restrain steel production in the first quarter of this year. Beyond what happens with steel production till March, Beijing has served notice of its commitment to carry on emissions control drive on its humongous metals and minerals industries.

Anticipating a further 50 mt squeeze in Chinese steel production in the current year, a CITIC Futures analyst expects a “broad, gradual decline” in demand for iron ore to be further aggravated by a “rather weak” property market, likely fall in metal demand and steelmakers in their journey towards environment friendly operation using growing volumes of scrap as a substitute for ore.

US credit rating agency Fitch says the real estate sector, a major steel user, find itself in a worsening debt crisis manifest starkly in the case of Evergrande, the world’s most indebted developer. Fitch says in a dismal scenario, residential home sales revenue in China might drop by 30% this year and a third of the country’s rated developers could face negative cash flow. The combination of all these negative factors will likely have a bearing on the volume of China’s iron ore imports in 2022 and therefore, on the mineral prices.

Incidentally, the country that accounts for over half the world steel production imported 1.17 bt of ore in 2020 and in the first 11 months of 2021 imports amounted to 1.04 bt. All these pessimistic forecasts will require moderation in case Beijing once again introduces fiscal stimulus to aid the revival of real estate sector. Was not China the first in the Covid-19 battered economies to be off the block to be back on revival path through monetary policy easing and sector specific stimulus measures? The country like on many occasions in the past may once again spring a surprise to come out of economic gloom. Macquarie Group says the current Chinese steel production is “unsustainably low” and it will not rule out a spike in iron ore prices at some point in the first half. Are we then going to see steel production revival in China post winter? In the midst of all the variables, including the likely impact on the economy of the Covid third wave, we have average iron ore price forecasts for 2022 ranging from a low of $70 to close to $100. At the forecast rates, major mining groups such as BHP Billiton, Vale and Rio Tinto will still be making a lot of money since their per tonne production cost is around $15.

Source: Financial Express

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