Iron ore futures posted a recovery today, after physical prices registered their steepest daily decline on 19 August amid limited demand and a weak outlook.
September iron ore swaps on the Singapore Exchange (SGX) fell by nearly 13pc yesterday, while iron ore futures on the Dalian Commodity Exchange (DCE) closed 6.21pc lower.
The paper market bounced back today, with the September contract on SGX up by 5.13pc to $137.30/dmt by 3.42pm Singapore time (7.42am GMT) and the January contract on DCE closing 0.26pc higher at 777.50 yuan/t.
"We had estimated iron ore prices to bottom out at $120/dmt due to shrinking demand. Now $100/dmt is possible after the sharp decline recently. The dive in the paper market [yesterday] was beyond expectations," a Beijing mill analyst said.
"Iron ore prices at $130/dmt is a reasonable level and with steel output cuts, iron ore is likely to remain in surplus," a Singapore-based analyst said.
Decline driven by steelmaking cuts
Market participants have cited steelmaking cuts in China as the main reason behind the persistent weak demand and consequent drop in iron ore prices, which have fallen by 40.3pc from 1 July to $131.80/dmt as of 19 August.
"The physical fundamentals are too weak, there are too many offers in the market with no buyer," a Beijing-based trader said.
Intense cuts are expected in July-December because of the government's goal of keeping steel output below or at last year's level of 1.06bn t. China's crude steel output fell for two months in a row in July, while output in the January-July period was 8pc higher on the year, according to the National Bureau of Statistics.
China has already rolled out year-long production cuts at its steelmaking hub of Tangshan, and strict production cuts are expected in other major steelmaking provinces like Jiangsu and Shandong.
The Chinese domestic steel market is also going through its seasonal weak demand season, during which mills typically undertake maintenance. Some mills were reselling their long-term contracted iron ore cargoes amid weak demand.
But steel prices have found support from output cuts. Domestic rebar prices in China stood at Yn5,010/t on 19 August, up by 2.99pc from 1 July, though prices were down by 4.2pc since 2 August. Domestic hot-rolled coil prices, meanwhile, stood at Yn5,630/t, up by 2pc since 1 July but down by 3pc since 2 August.
Flight to quality grounded
The spread between the Argus 65pc and 62pc indexes stood at $18.75/dmt on 19 August, the narrowest since 8 January. "Mills are focused on production cost controls instead of productivity," a Shanghai trader said, adding that any support for iron ore demand may only be seen around mid-September when restocking ahead of China's 1-7 October national day holiday emerges.
The loss in productivity is also reflected in the brand differentials, with the BRBF premium to ICX narrowing to around $3.30/dmt this week, falling below $4/dmt for the first time since June this year.
Chinese mills are also moving away from pellets and lump, resulting in low liquidity in both seaborne and portside markets.
The Argus 62pc Fe iron ore lump premium on a cfr Qingdao basis plunged by 71.9pc from 72¢/dmt unit (dmtu) on 1 July to 20.2¢/dmtu on 19 August. The iron ore blast furnace pellet 64pc Fe, 2pc alumina cfr Qingdao index dropped from $272/dmt in the week ended 2 July to $195/dmt this week, down by 28.3pc.
Steel performance, supply to set direction
The recent decline in prices has left many wondering about iron ore demand in September and beyond, when steel demand traditionally picks up.
China's industrial output and real estate investment growth slowed in July. "If there's no pick-up in steel demand by early September, [the] iron ore market will lack support during the traditional peak season for steel sales," a Hebei mill manager said. Tight iron ore supplies in the first half of the year were also a factor that pushed prices to record levels.
Supplies are expected to increase in the second half of the year despite challenges. "We expect iron ore shipments to be at the low end of the guidance range, which remains subject to Covid-19 disruptions, tie-in and ramp up of brownfield replacement mines and management of cultural heritage," iron ore producer Rio Tinto said last month. And maintenance at BHP's Nelson Point No.1 car dumper at its port facilities at Port Hedland of Western Australia is set to drag into next quarter, weighing on shipments.
Chinese portside stocks stood at around 128mn t this week, up by 1.3pc on the week, market sources said. "We expect to see a historical build-up of portside stocks in China by the end of the year given the poor demand," the Singapore-based analyst said. Another trader disagreed with the view, though he conceded that stocks would likely approach the 150mn t mark by the end of the year. A build-up of vessel queues at Chinese ports amid Covid-19 protocols has also slowed port operations. The queue now stands at 185 vessels from 199 vessels last week, a trader said, anticipating more cargoes to be unloaded in the coming weeks. "The strict quarantine measures at Chinese ports and Typhoon InFa had slowed port operations, causing severe congestion, with unloading time at 8-10 days," a north mill buyer said.
