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Vale's weaker production, China demand supports iron ore outlook

HIGHLIGHTS

Vale iron ore output in Q4 weaker than expected

Analysts see China steel demand still strong, with potential slowdown

China's Australia iron ore imports grew in Jan


Miner Vale's weaker-than-expected iron ore and pellet production for the fourth quarter, ahead of the seasonally slower rainy season in Brazil, may have injected strength into iron ore prices, according to analysts.


Strong global iron ore demand and imports in January, and persistently strong crude steel and pig iron production in China, leading to an increase in product inventory, may have boosted trader confidence.


S&P Global Platts IODEX 62% Fe fines index rose 3.95% to $158.05 on Feb. 4 from the prior session, in the first trading day after Vale published its 2020 production report.


"Iron ore rose on supply concerns after Vale's iron ore output in Q4 2020 came in just below expectations and below Q3 2020 levels," Commonwealth Bank of Australia analyst Vivek Dhar said in a Feb. 5 note.


Vale's iron ore production fell 0.5% to 300.4 million mt in 2020 from a low level in 2019, which followed December's revised guidance of 300 million-305 million mt.


The decline follows the Brumadinho dam disaster's impact on company operations in southern and southeastern Brazil since late January 2019.


Vale maintains its 315 million mt‑335 million mt iron ore target for 2021. Vale's pellet output in 2020 fell 29% to 29.7 million mt, and just below the 30 million-35 million mt guidance for 2020, according to a quarterly production report late Feb. 3.


"The modest increase in Vale's output should weigh on iron ore prices this year, but iron ore prices will likely find support if Vale falls short of their production guidance," CBA said.


Credit Suisse forecast boost


Credit Suisse on Feb. 2 lifted its 2021-22 iron ore price forecasts by 40%-50%, expecting prices to hold above $100/dmt through 2022, with a forecast of $150/dmt for 2021, and $120/dmt for 2022.


The bank cited higher Chinese steel output estimates and iron ore supply issues "becoming endemic."


Credit Suisse said it was difficult to estimate China's steel production trends from the second half of 2021, especially without policy guidance from Beijing's new five-year plan.

"For supply, we have substantially reduced our production forecast for the two largest producers -- Vale and Rio Tinto -- across the forecast period following Vale's lower guidance from December, and potential difficulties arising from Rio Tinto's Juukan Gorge scandal," Credit Suisse said in a report.


China's steel production had dipped by the end of January ahead of the Lunar New Year holiday, according to China Iron & Steel Association data, while remaining stronger on an annual basis.


A large part of China's steel demand in 2020, when production rocketed to over 1 billion mt, came from the construction sector followed by manufacturing, ANZ investment bank analysts said in a Feb. 4 note.


Asia infrastructure, property


"We expect Asian infrastructure and manufacturing demand to remain strong. Steel production should also benefit from environmental policies," ANZ said.


Headwinds are gathering for iron ore prices, even with lingering steel support, ANZ said.

"Restrictions on the property sector are likely to take the edge off steel demand growth," it said. "Weak margins for Chinese steel mills may lead to capacity reductions and Chinese authorities reinforcing supply side reforms."


China's January iron ore imports growing to 108 million mt is a sign of a strong start to the year, data group Kpler wrote in a report. Kpler analysts pointed to steel inventory builds as a potential cause for concern for future demand, "implying some overproduction through the iron ore to steel conversion process."


Other market observers pointed to signs of normalization in China's steel chain, expecting strong demand to replenish lower stocks at steel mills.


"Domestic iron ore inventories which drew slightly between November and December, have since remained decidedly flat, implying well-balanced supply and demand for the moment," Kpler said.


Chinese iron ore imports from Australia in January rose to 82.7 million mt, a record level, Kpler added.


"China has little optionality but to continue purchasing from Australia given the state exports some 60% of all iron ore tonnage," Kpler said. "China regularly imports 76% of all seaborne i/o tonnage, 64% of which is sourced from Australia."


Source: S&P Platts

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