What’s Happening to Iron Ore Prices?

price-squeezeAfter a robust and steady 2013, iron ore prices are looking vulnerable, as stockpiles rise in China, the world’s largest consumer of the steelmaking ingredient. 

On Tuesday, the price sunk below $130 a tonne for the first time since July, due mostly to a sluggish outlook for steel demand in China. Chinese steel mills have been stocking the material after recent increases in imports mostly from Australia and Brazil, the two most significant iron ore exporters, and that has put down-side pressure on the price.

Chinese iron ore imports last September reached a record 74.6 million tonnes on robust steel demand.

But in 2013, the country’s inventory of iron ore shrank rather than grew, because all imports were immediately used by steelmakers rather than stockpiled. Now that trend appears to be reversing.

MINING.com reported that Chinese iron stockpiles rose to 88.6 million tonnes in December, up 21 percent from a year ago. Last week stockpiles of imported iron were at 89.5 million tonnes, which is the highest they’ve been since November 2012 according to Chinese consultancy Steelhome.

More restocking is expected as steel producers prepare for the lull that accompanies the annual Spring Festival break at the beginning of February.

“Downstream demand for steel is bad and spot billet prices are weakening, said an iron ore trader in Shandong province quoted by Reuters yesterday. “We are still considering whether we should buy cargo for February or March because we’re not sure if prices will rebound or fall further.”

Compounding the problem is the fact that China is suffering from a glut of steel, which has put downward pressure on prices and prompted some mills to reduce steel production and purchases of iron ore and coking coal. Reuters pointed out that average daily crude steel output was at 1.961 million tonnes in late December, the first time the pace fell below 2 million tonnes since last February.

Some analysts believe that a slowdown in Chinese steel production appears inevitable this year amid overproduction, a continued government crackdown on iron ore producers due to environmental concerns, and weaker domestic demand from a cooling Chinese economy. All of those factors, along with an expected 22 percent increase in shipments from Australia, would be bearish for the iron ore price.

On the other hand, those who take a more bullish view think that in 2014, supply will struggle to keep up with demand, not only from China but Japan and South Korea. Mark Lackey, executive vice president of CHF Capital, said in December that he sees iron ore continuing to maintain the $130 to $140 range on the back of continued urbanization in China — which drives the housing and construction sectors that demand steel.

A report by the World Bank has iron ore averaging $135 a dry metric ton in 2014, and rising to $145 a tonne in 2025.

 

Related reading:

Iron Ore Outlook: Analysts Divided on Price

Mark Lackey Bullish on China, Iron Ore Price

Is the Iron Bull Run Over?