Daily iron ore price update (break)

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Here are the iron ore charts for August 15th, 2014:

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More weakness in paper markets. 12 month swap is still $1.61 above it’s 2014 low but Dalian has dropped through the trap door to new lows. Rebar futures are also poised for all time lows.

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Physical spot held up but rebar average is right on its 2014 low and looks likely to take it out in short order. The BDI cape has gone bananas, up another 20% and approaching July highs.

An article from Fairfax forecasts price rises:

The benchmark iron ore price may have fallen to a 55-day low, but most signals suggest the price will rebound over coming months.

Australia’s most lucrative export commodity was fetching $US93.20 a tonne on Thursday, having fallen on each of the past four trading days.

Iron ore prices have been weighed down in 2014 by a huge increase in seaborne supply, but the past week’s price weakness was also thought to be affected by weak lending statistics in China.

…Iron ore futures measured by the Dalian commodity exchange fell to their lowest level since June 20, but in a positive sign for iron ore producers, the futures were predicting an iron ore price for January delivery that was equivalent to $US106.25 a tonne at current exchange rates.

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My understanding is that Dalian futures include a 17% value-added tax, port charges and other fees that add up to around 30% of the underlying price. When they are removed the six month future is roughly pricing low $90s equivalent for iron ore spot in January. This is the same price range currently available in the Singapore 12 month swap. If the arbitrage were as large as that implied by the article then some enterprising trader would be piling in to close it. Happy to hear any view that gainsays this…

But let’s not stop there. For the past six months or so I restarted using the Baltic Dry capesize index as a indicator. It’s never been a terribly precise beast and post GFC it ceased to function at all amid a capesize glut. But after 2012 some volatility returned and it appeared to recover some predictive power for turning points in the market. The current spike has had me thinking this weak spot will pass.

I’ve charted its efficacy below. The red stars are iron ore price lows leading to a 5% or more jump in the price and black stars are iron ore price highs leading to 5% or more slump:

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I was disappointed when I plotted this. The results look 50/50, pretty much a random walk. The current steep bounce is also in question at Platts:

The Capesize market has seen a spike in rates since the start of this week, led by higher front-haul fixtures, market participants are skeptical about the sustainability of these levels.

…The rise has been attributed partly to the loading window moving into September, the start of the third quarter that seasonally sees higher iron ore volumes heading to China, market sources said.

…”We remain positive on the underlying fundamentals in the dry bulk market, in which Brazilian iron ore export growth plays a key role,” said Erik Nikolai Stavseth, an analyst at Artic Securities. “[In the] short term, we expect volumes out of Brazil to pick up in the second half of 2014 and support a recovery in Capesize spot freight rates through Q3 and Q4.”

“Since last week there has been a definite sense of optimism in the Capesize market, initiated by a notable rise in the West Australia market, but the returns on the Brazil trade have increased [it even] more,” a broker report seen Thursday said.

Some market sources said, however, that the Pacific market had firmed up independent of the Atlantic, citing increased activity this week.

The market is, however, cautiously optimistic on the spike in rates, with some questioning its sustainability.

…”Fundamentally, it’s still more tonnage than cargo,” a chartering source said this week, adding that approximately 7-8 ballasters were due in Brazil at the end of August, with no cargo available for loading. “I don’t see fundamental changes in the market; the market is going up on sentiment.”

Another charters agreed, saying: “The longevity of this rally must be questioned, as despite the anticipated seasonal uptick, the market does seem well-supplied with tonnage.”

I will downgrade its usefulness in my tool kit. And yes, there is more! China’s National Bureau of Statistics has reported high ongoing domestic output of iron ore. From Reuters:

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Domestic miners produced a total of 136.7 million tonnes of iron ore in July, data from the National Bureau of Statistics showed on Thursday, defying analysts’ expectations of widespread shutdowns.

…”I think the data is pretty unreliable and we don’t use it,” said Graeme Train, analyst with Macquarie in Shanghai.

“If you look at everything else, there are quite a lot of indications that domestic production is actually pulling back. Surveys of domestic mines show sharp contractions in utilisation rates, and Mysteel’s steel mill survey on ore usage shows that the share of imported ore has gone up.”

According to the latest Mysteel survey, domestic iron ore made up just 4.3 percent of totalsteel mill inventories by Aug 14, down from 28.6 percent in late February.

According to index prices compiled by the China Iron and Steel Association, domestic ores cost an average of 727.24 yuan ($118.2) at the end of July, compared to an average spot price of 695 yuan for imported varieties, putting domestic producers at a disadvantage.

Fair enough, but those MySteel statistics also look dodgy. If the falls in domestically sourced ore were that great then the market would have balanced far more than it has.

In sum, despite spot holding up, I’m less convinced today than yesterday that we’re at the end of the Q3 destock. Price action in all markets except the BDI is bearish and with the steadily deteriorating macro backdrop we could go lower for a couple of weeks before any Q4 restocking action.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.