Iron ore crash

Iron ore is crashing. Overnight the price fell 7% plus to $131.70:

Thankfully, 12 month swaps only fell 1% to a new low of $117. Shanghai rebar was also flat on the day.

But, as China iron ore port stocks show, there’s plenty in reserve if the draw down continues:

So, there’s some inconsistency here. Obviously rebar looks to be holding up better (down only 18%) than iron ore (down 30%), suggesting oversupply in the latter. And, from Reuters, that’s what we find:

World No. 2 iron ore producer Rio Tinto on Tuesday blamed Vale for sharply falling spot prices of the steelmaking raw material, saying its bigger rival is diverting European shipments to China.

The move by Vale had not caused Rio to stop running its own iron ore mines at full capacity, Rio’s iron ore division head and Australian chief executive Sam Walsh said.

“My business is shipping flat out,” Walsh told a business forum in Perth on Tuesday. “We are producing at record rates.”

Spot iron ore prices have shed 19 percent so far this month in a sell-off largely fueled by slower construction steel demand in China, the world’s biggest buyer of imported iron ore at around 400 million tonnes a year.

In Europe, a more important market for Vale than Rio, steel markets have taken a knock given uncertainty surrounding the region’s debt crisis.

Growth of Europe’s steel production will slow in 2012 along with activity in the steel-using sectors, Eurofer, the European steel producers association, has forecast.

Spot iron ore prices on Tuesday fell nearly 4 percent. It was the biggest single-day drop since August 2009 as thin demand from China forced some traders to sell at a loss.

“Traders who can’t hold positions because they don’t have sufficient funding are selling at a loss of $40-$45 a tonne,” said a Singapore-based iron ore trader.

Despite price falls, all three mega-producers including Rio are ramping up production, with Walsh downplaying the lasting effect of Vale’s strategy.

“There’s a limit to what they can physically ship,” Walsh later told Reuters on the sidelines of the forum. “We’re not overly concerned about that.”

He said Rio remains confident in the long-term drivers of economic growth and iron ore demand in China.

“The issue is contagion. It’s perception, it’s fears,” he said. “When you look at the fundamentals of China, India, South Asia, North Asia, we find it’s very robust.”

And so what? Since when was iron ore a regional market? I’m wondering how long it will take Rio to stop saying that they’re producing flat out, that doesn’t look so hot in a competitive market.

It seems Australia is suddenly much more exposed to Europe than pundits thought. And it will get worse before it gets better with the Continent only now tipping into recession, not yet embarked on its version of the inventory cycle.

But according to the FT, there is also a Chinese angle:

The production cuts at small and medium-sized Chinese steel mills present fresh evidence that Beijing’s monetary tightening is filtering down into slowing demand for raw materials. Although China’s steel demand outlook has not changed in recent weeks, traders and executives say financing has dried up for some mills, prompting them to cut output and reduce ore purchases.

“Around 20 to 30 per cent of the small and medium mills in this area have shut down their furnaces,” said a steel executive in southern China. “Our mill hasn’t reduced production yet, but we feel the pressure of reduced liquidity. When we make sales, the cash comes back slower and slower. Liquidity is a big concern.”

One trader in the steel town of Rizhao added that some mills had brand new furnaces idled. “They don’t want to produce because they will just lose money.”

…Consultancy MySteel estimates that 5 per cent of China steel production has been taken offline in recent weeks. The small steel mills cutting their production typically buy iron ore on the spot market, largely from Indian miners, so their absence can cause spot prices to fall disproportionally. Larger steel mills, which buy their raw materials from bigger miners, are still going strong, traders said, although some have announced maintenance-related production cuts.

The construction sector, a major source of steel demand, has slowed this year as Beijing has tried to cool real estate prices. Over the past year China has raised interest rates and bank reserve requirements in an effort to fight inflation, and these measures have restricted the flow of credit into the economy.

My bet is coking coal will follow, though perhaps not so far. At some point, something will stop and reverse the falls, perhaps anticipation of a Chinese stimulus by year end, but with Europe likely to deteriorate, that may not be enough to bounce the price very far.

What I can say is that if current prices are sustained for any period, as the IMF recently made clear, we are facing a terms of trade shock and recession next year.

Houses and Holes

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.

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Comments

  1. As per my comment the other day on coal, the scale of the falls wasn’t that clear. Is it possible to have a chart overlaying both iron ore and coking coal?

    Also do you have data which you could overlay of China port stocks for iron and coal?

    If this is purely a steel induced fall then coking coal should be tracking it.

    The thing to remember is that iron ore is highly profitable at these prices. The problem, as I see it from the iron ore bull point of view, is that valuations of producers have been way too optimistic in their forward estimates of prices. Almost record prices as far as the eye can see …in some cases coupled with volume increases. So if you were a buyer at those valuations there didn’t really seem to be any upside. Only downside following price falls. If stock prices drop after a period of iron ore at this level or below they’ll start to look attractive again.

  2. That’s pretty stark, and the RBA will have to order in more coffee while they discuss how they can spin this. Still, let’s see what a full quarter looks like, but I’m not betting it will be up, but either flat, or trending down.

  3. Er, so what happened to that bounce? And why are Chinese shipping rates going up?

    BTW, is “Crushed: ore” worse than “Hammered: ore”? What are you going to call a 10% fall?

    • I would ignore the Baltic Dry, it’s no longer reliable. Rates for ore bulkers cracked recently anyway. Was in the links recently.

      As for the bounce, I assume you mean the equities rally? Which is fading along with European hopes.

      • I would ignore the Baltic Dry, it’s no longer reliable

        Not sure if its the BDI but the dude on ABC news last night (not Kohler) showed a chart of the iron ore price vs “Shipping Rates”.

        Watch here from 24:00.

        I think he’s been reading your recent stuff on ore prices.

        As for the bounce, I assume you mean the equities rally?

        Not I meant the bounce in the iron ore swaps market that supposed to lead the spot price, right?

        Anyway, looks like if its a Risk Awwwwwwn day ore slips a tad, but ifs a Risk Awwwwwfff day ore gets crushed.

          • The ABC has seriously misled the public on this…

            Yeah apparently “it suggests China is stepping up its buying” (!)

          • Good link.

            Capesize is the relevant vessel for iron ore (and that was what the ABC showed incidentally) but your link shows a rise for atlantic delivery but not much for pacific delivery.

            So presumably there is some sort of squeeze over there but not much here.

            I’d conclude from your link that the rise in the capesize index at the same time as the fall in iron ore is coincidental.

  4. I’m amazed that AUD/USD is still above 1.04 considering the potential for large risk off after EU meeting, the fall in iron ore prices. Aussie rates are only going to go one way as well.

  5. World No. 2 iron ore producer Rio Tinto on Tuesday blamed Vale for sharply falling spot prices of the steelmaking raw material, saying its bigger rival is diverting European shipments to China.

    So globalization applies only to mere mortals in the labor force? What a bunch of hypocrites.

  6. Diogenes the CynicMEMBER

    Hat tip to HnH here!

    Not unexpected from my end but the scope of the price falls and the speed of the adjustment is breathtaking.

  7. Andy DragoMEMBER

    Just one man’s opinion here but I think that the rise in shipping rates and the fall in iron ore are related. Shipping rates have come up substantially in August driven by Brazil’s recovery from the rains early in the year and the pick-up in mining and shipping rates for the ore. It takes 40 days for the ship to get from Brazil to China. So the high shipping rates from Brazil (32 million tonnes in August and 30 million tonnes in September, compared to Jan-Jul average of 25 million tonnes per month) are hitting the Chinese shores now and into November.
    Although the stocks of iron ore at ports are declining, the “floating” stocks in the Chinese waters are increasing. Macquarie pointed this out in their note on Tuesday: “Latest data shows that iron ore port stockpiles in China have dipped below the 80 million tonne mark for the first time in 2011, having fallen by 2.8mt over the past two weeks. However, this can be contrasted against a large rise in floating stocks in vessels outside Chinese ports, which have risen dramatically from 7.5mt at the end of September to over 14mt currently.”
    Port Hedland has been running at 20mt per month in both August and September – about 2mt per month more than May-July average – only 12 days shipping distance to China.
    So, essentially, the big increase in supply caused the shipping rates to go up (also shipping to China takes longer than shipping to Europe so more vessels have to be hired). It was coincedent with a decline in demand from Chinese and European still mills.
    The result? The $40/tonne fall in iron ore price over 12 trading sessions.
    My personal opinion – it will settle somewhere in the $80’s by December. Then the rains begin and the suppply gets puckered agaian and there could be a small rally.
    Anyway… I’m rambling…