I didn’t bother commenting much on last week’s “bondcano” debate in the MSM, from The Australian: Australian stocks trading at a premium are looking vulnerable as the bond market “erupts” from recent lows, according to Credit Suisse, which names Transurban, Sydney Airport, Healthscope and Crown as among those on shaky ground. Equity strategist Hasan Tevfik
A brief history of the seaborne iron ore price
The contemporary seaborne iron ore price first emerged in 2003 when the Chinese development model shifted up a gear. Indian suppliers broke free of an annual contract pricing system that had been dominated by Australia, Brazil and Japan for decades.
As Chinese demand surged, traditional supply and pricing mechanisms could not keep pace. Indian miners in Goa and Karnataka had surplus supply and filled China’s marginal new needs outside the old benchmarking system.
But it still wasn’t enough and other non-traditional suppliers began to emerge in South America and Africa. These needed more dynamic pricing mechanisms and by 2008 Platts, Metal Bulletin and The Steel Index were publishing a daily iron ore price.
As the Chinese demand surge continued, by 2007, major Australian iron ore miners were charging enormous premiums to prices from five years earlier. The annual benchmarking system began to strain to the point breaking, including significant diplomatic tensions between Australia and China. This culminated in a proposed merger of BHP and RIO Tinto which triggered panic in Beijing as it feared an already supply-constrained market and soaring iron ore price would by made worse by monopoly pricing. The Chinese SOE, Chinalco, moved the buy a blocking stake in RIO Tinto.
However, the GFC intervened and deflated tensions as Chinese demand collapsed. But Chinese steel mills found themselves still tied to very high prices and an annual iron ore price benchmark that did not reflect the new reality. Many defaulted on cargoes and walked away from deals.
To fight the downturn, China unleashed an enormous fiscal and monetary stimulus that soon had China building more than ever. The demand for iron ore rocketed to all new highs. With the memory of contract defaults fresh in their minds, major Australian miners, led by BHP and CEO Marius Kloppers, abandoned the annual benchmarks, forcing Chinese steel mills to adopt a short term iron ore price using spot and quarterly contracts. Brazil joined in in 2010.
Iron ore price at new records
The spot iron ore price soared to all new highs and triggered a global wave of new supply from producers such as Fortescue Metals Group, Ferrexpo, Kumba Iron Ore, Anglo American and Sino Iron.
With the rise of the short term iron ore price market, iron ore derivative markets grew. First in the Singapore on the SGX and later in China as the Dalian Commodities Exchange and the United States at Chicago Commodities Exchange (CME). Iron ore derivatives could hedge and future price iron ore output.
These last developments coincided with the peak in the China boom and prices began to fall from 2012. After peaking above $190 per tonne, the iron ore price collapsed into the $30s in 2015 as new supply outstripped demand.
Ahead were still many years of oversupply, a lower iron ore price, consolidation and mine closures…
From Macquarie: Almost exactly a decade after the merger of Arcelor and Mittal and Tata’s takeover of Corus, and steel mega-deals are back in vogue. While there are some similarities in the current deals, the market backdrop could hardly be more different. In 2006 industry capacity utilisation was touching 95% at times, and China
Brent oil was clubbed lower to $46.41. Henry Hub is still warm: The OPEC freeze has now reached its inevitable denoument, from Bloomie: As producing countries gather in Algiers for talks on Wednesday, Saudi Arabia signaled for the first time it may accept the idea that Iran keep output at maximum levels but doesn’t expect
Iron ore prices for September 27, 2016: Tianjin spot eased to a half percent $56.20. Paper was stable overnight. Rebar is firm and needs to roll before weakness returns to iron ore. In news, Roy Hill is has signed up its tonnes: Emerging Australian miner Roy Hill has signed term contracts for over 90% –
Dalian is down 2% today taking Big Iron with it. BHP is -1.3%, RIO -1.2% and FMG -1.8%: This despite upgrades from MS: Bulking up in 2016-17: The Commodity price revisions – “Global Metals Playbook: 4Q 2016” – are most pronounced in the bulk commodities. These are the materials thathave benefited most from the stimulus
Iron ore charts for September 26, 2016: Tianjin spot fell 0.2% to $56.40. Paper was unchanged overnight. Rebar jumped. The two coals continue to rocket on Chinese restocking but the end is now high as Chinese authorities meet Friday to short-circuit the rally. In news, SGX provides some good material on coking coal: The recent
BHP is still trying to break its bullish ascending triangle pattern today down -0.2%. RIO is flat and FMG -1.2% as Dalian has lost much of its overnight gain at the open: Big Gas is bearing up OK as OPEC leaked details of Saudi offering to cut production, rebounding oil a little from the Friday shellacking.
From the AFR: Goldman Sachs Group has responded to the dramatic coking coal rally by saying higher prices for this year’s best performing commodity may be here to stay. Spot hard coking coal has more than doubled this year to trade above $US205 a tonne as a new Chinese government policy reduced the number of annual
Tianjin spot rose 0.5% to $56.60. Paper jumped overnight. Steel firm. Port stocks down another 330kt. At this point there is little evidence of demand falling away. What has faded prices is the turn in inventories and return of supply. I expect the demand fade is still ahead and prices to continue down. In news,
From Macquarie’s latest Chinese steel mill sentiment survey: Orders and sales: Mills reported improved domestic orders over the past one month, driven by a clear pick-up in orders from infrastructure, construction and auto sectors. This is in line with the official statistics that both infrastructure and property FAI rebounded in August after a soft
Iron ore charts for September 22, 2016: Tianjin spot jumped 1.6% to $56.30. Paper was flat overnight. Rebar was flat yesterday. Financialisation is wreaking havoc with this market again but I still can’t see how it can overcome clearly weakening fundamentals. Perhaps it can prevent the seasonal falls from getting too deep. In news, Vale
From Reuters: The talks have since slowed down significantly and “Vale has expressed that they are less enthusiastic at the moment”, Fortescue Chief Executive Nev Power told Reuters on Thursday. “Presumably they have higher priorities in the short term. Ultimately the need for it will be there and we think that interest from customers will
Here’s the latest from Reuters in iron ore: Surging coal prices are prompting many Chinese steel mills to opt for higher grade iron ore to boost efficiency and use less coal, forcing suppliers of low-grade ore from India and Iran to offer deep discounts to attract buyers. At an annual iron and steel conference in
From Macquarie: According to the latest CISA 10-day statistics, in the first 10 days of September its member mills’ daily crude steel production climbed by 4.65% from late August to 1.76mtpd, which is the highest production rate since June this year. Steel inventory among those major mills increased by 11% since the end of August
Iron ore charts for September 21, 2016: Spot up 10 cents to $55.40. Paper salivated at the Fed overnight. Rebar bounce. Nothing changed. Going lower. In news, the World Steel Association released August data: World crude steel production for the 66 countries reporting to the World Steel Association (worldsteel) was 134.1 million tonnes (Mt) in
From Macquarie: Metals and bulk commodity markets are in the midst of a mini-renaissance, with the vast majority of those we cover showing gains over the levels seen at the start of the year. While supply always gets focus, it is the demand side of the equation that has been more influential in this
Poor old BHP is suddenly fighting a losing tax battle on two fronts. From The Australian: BHP Billiton says it is ready to fight for the legitimacy of its controversial Singapore marketing hub in court as the tax bill for the operation climbs above $1bn. The mining giant has received fresh tax bills for the
Iron ore price charts for September 20, 2016: Tianjin benchmark was unchanged at $55.30 despite a bid in paper markets. Rebar is still falling and no wonder. CISA steel output jumped nearly 5% after the G20: Coking coal continues to hit new highs and mill profitability new lows: From Reuters: End-users of steel – such
Big Iron is back, pinning its hopes to China’s suddenly gob-smacking property bubble (pun intended) with BHP 1.2%, RIO 1.5% and FMG 2.1% and again pushing $5: Dalian has opened soft after last night’s gains and I really can’t see the upside here. We’re still headed into seasonal weakness, port inventories are destocking, coking coal
Iron ore price charts for September 19, 2016: Tianjin benchmark fell 0.4% to $55.30. Paper rallied overnight on housing bubble hopes. Rebar is sinking. That’s the key signal now. Port stocks rose a modest 150k to 103.25mt tonnes. So far, a 3mt ports destock has dropped prices 10%. Iron ore prices are going to fall
Chinese markets have re-opened after a few days off and Dalian iron ore is immediately under pressure again, down -1%. Big Iron is mostly following with BHP -0.6%. RIO -0.9% but FMG up 0.6% just because: Big Gas is enjoying a better day as oil rallies on Libyan tensions and OPEC scuttlebutt with WPL -1.6%,