Iron ore bounces (from a fall it never had)

It had to happen. Iron ore has found a bottom for now. The ore spot price closed yesterday up 1.3% to $118.40. Twelve month swaps are up big for two days and 5.5% yesterday to $127.94. Shanghai rebar is steady at 3640.

So, is it over and can we expect a v-shaped recovery? First things first, I’ll just take a quick detour to lambast the editors to Australia’s papers who have done an appalling job of covering the crash, beyond recycling the utterances of a few deified ore magnates. To get some sense of what is actually happening in the ore market, we have to look overseas where we can find something resembling functional media.

To India then, where the Business Standard offers a quite useful take on an emerging global steel glut:

It is in itself some achievement that the country’s steelmakers are able to engage their customers in discussions about price revisions of products for long-term contracts in the present difficult circumstances. This is because the initiative stands in rather sharp contrast to the scene in the northern hemisphere and China. In both regions, steelmakers are doing a few things to regulate production in anticipation of further fall in prices and their margins coming under increasing pressure. In spite of Western countries returning to work after a traditional holiday break for a month, global production in September, according to the World Steel Association (WSA), fell by 674,000 tonnes to 123.57 million tonnes (mt) over the previous month. This is the lowest since February, when world output was 118.36 mt.

What is a pointer to further disturbances in store is Chinese production contracting 3.5 per cent in September to 56.7 mt, the lowest in seven months. Incidentally, September marks the beginning of the peak steel consumption period in China. The Chinese economy grew 9.1 per cent in the third quarter of 2011, nothing exceptional for the Middle Kingdom but absolutely exceptional by any other parameter. But this growth rate could not stop Chinese steel prices slumping to their lowest in 10 months. As demand remains weak, hot-rolled (HR) coils are selling at $648 a tonne (4,123 yuan) and rebar finding application in construction at $675 a tonne. These prices may be at 10-month lows, but even then, Chinese steelmakers have braced themselves for further price fall.

The benchmark product HR coils are selling in the US and European markets at a discount of anything up to $250 over the April peak rates of $900 a tonne. Observers will not rule out HR coils seeking still lower levels because of the domino effect of European Union’s sovereign debt crisis, pursuit of tight monetary policy by major economies like China and India at the cost of growth and a global steel supply glut. What do we get to see in the West? In a falling market, steel buyers at the distribution sector, as is to be expected of them, are keeping their inventories low. Many are pressured by their banks to return the loan money. Steel no longer finds favour with banks. At the same time, US producers who till recently were not inclined to cut production and instead marked up spot prices of HR coils by $60 a tonne in August, are now inclined to sell the metal at discounted rates. They do not want to be left with bloated inventories. In the present market for steel and steel-making raw materials, announcing another price rise by some mid-sized US mills is nothing but a show of bravado. How could anyone in this environment see signs of demand improving for hedges to be sought?

Here in our country, demand in the first half of 2011-12 grew disappointingly at 1.8 per cent on a year-on-year basis. This falls considerably short of WSA forecast of Indian steel use rising 4.3 per cent this calendar year to 67.7 mt. In the first nine months to September, India’s crude steel production was nearly 54 mt, signifying an easy supply situation. Steel secretary Pradeep Kumar Misra says by 2013-14, the country would have added 45 to 47 mt of new capacity. Misra and SAIL chairman Chandra Sekhar Verma attribute the tepid demand growth till September to seasonal factors and they think this will get corrected as we go forward. Not everyone is, however, a taker of their optimism of a 9 to 10 per cent demand growth happening this season. After all, the industrial growth rate between April and August was 5.6 per cent, against 8.7 per cent in the corresponding period of 2010-11. Perhaps the steel demand scene will get better once the 12th plan, providing an investment of $1 trillion in infrastructure development is launched next year.

As the world, and Asia in particular, is deluged by steel, we are seeing reports of disappointing earnings by companies in Japan, South Korea and India.

Dispirited by the economic outlook, a spokesperson for Posco says prices are likely to fall till the first half of next year. He is viewing the company’s fourth quarter earnings to be the “worst this year.” Meantime, slowing demand growth in the face of oversupply has led both Nippon Steel and rival JFE to downgrade their full-year outlook. The world’s biggest steelmaker, ArcelorMittal, is trying to make the best of a bad situation by switching off blast furnaces (BFs) at several centres in Europe while trying to lift production at its low cost plants. Other mills, including many in China are advancing maintenance schedules to keep production down for the time being. Some are postponing the relighting of BFs, though repair work is complete. The situation has come to such a pass that falling prices of raw materials are not leading to any improvement in steel profit margins. Because it will be some time before steel has found its bottom.

Thank you Indian media. Meanwhile, from Reuters we get an equally pessimistic assessment of iron ore demand:

Leading Chinese mill Baoshan Iron & Steel Co Ltd (Baosteel) was also talking up its prospects, telling an online shareholder briefing on Monday that global iron ore prices had reached a “turning point” that would benefit miners and steelmakers.

But the broker was pessimistic, saying: “There is so much cash available that everyone is looking for any piece of good news to pump it into a market.”

“We don’t have the free flow of credit so that everyone can use each other’s money to get the market moving — who knows what will get things moving again? Under the current circumstances I am not bullish at all. We will be lucky to get back to levels of $150 by next year.”

Despite the gloom, there has been no slowdown in deliveries from the big suppliers. Zhang of CISA said stockpiles of imported ore at nine major ports stood at 98 million tonnes.

“I think traders are suffering the most right now — obviously the decision is either to sell now and make losses, or to wait and risk further losses,” said a trader based in Beijing. “A lot of it has been bought at $150, $160, even $180 (per tonne) and now we are lucky to get $120.”

Thank you French media. Could these bearish prognostications mark the bottom of the market? Perhaps, but Morgan Stanley doesn’t think so (I am skeptical as well):

Iron ore prices may fall to a low of $95 a metric ton in the short term, reflecting the combined effect of cargoes displaced from Europe by cyclical weakness in demand, a steel inventory destocking cycle and seasonal factors in China, Morgan Stanley Melbourne-based analysts Peter Richardson and Joel Crane wrote in an e-mailed report.

Iron ore prices fell to $116.90 a ton on Oct. 28, according to the Steel Index, slumping 32 percent since the start of the month. Prices are expected to average $160 a ton during next year as Chinese steel mills restock, Morgan Stanley said.

Restock? Well, sure. When they’ve destocked. As I have noted, there has not yet been a material drop in iron ore port stockpiles so downward pressure could easily persist. Here’s the chart:

Moreover, European weakness is going to worsen before it gets better. The only thing I see turning the market for good is China easing up on its fixed-asset crush, which doesn’t seem in the immediate offing either.

Meanwhile, China’s notorious CISA is back and beating the drum for  the move to spot pricing:

China, the world’s biggest iron ore buyer, said it’s held talks with Vale SA, Rio Tinto Group and BHP Billiton Ltd. to set up a new pricing mechanism after a plunge in cash market prices.

“We hope to build a new stable, transparent, fair and reasonable pricing mechanism,” Zhang Changfu, vice chairman and secretary general of the China Iron and Steel Association, told reporters today in Beijing. “We wish to make it more well- organized and healthy.”

…Baoshan Iron & Steel Co., China’s biggest mill, is in talks with Vale on fourth-quarter ore prices, and expects its raw- material costs to drop under a new pricing model, General Manager Ma Guoqiang said today in a webcast meeting with investors. He didn’t provide further details on the new model.

Vale, together with BHP and Rio, in 2010 abandoned a 40- year custom of setting prices annually in favor of quarterly iron ore contracts as spot prices gained. The quarterly contracts are based on a three-month average of spot price indexes for the period ending a month before the onset of the new quarter.

Accelerating Moves

The plunge in iron ore prices is accelerating a move to shorter pricing methods and closer to spot, Rio’s Chief Executive Officer Tom Albanese told analysts last week. Rio, the second-largest iron ore producer, sold about 86 percent of its output on a quarterly basis, he said.

BHP, the world’s largest mining company and third biggest iron ore producer, is selling the “vast majority” of its iron ore on monthly prices, Chief Executive Officer Marius Kloppers said this month. The top three producers control about 62 percent of the total seaborne trade, according to Bloomberg Industries.

…The “turning point” of a global iron ore shortage may come at the end of next year or 2013 as new mining projects come on stream, Baoshan’s Ma said today. The company had previously forecast the market to move into surplus in 2014.

Thank you US media. The only reason I can see for China to push for the move to spot asap is cheaper prices more quickly.

David Llewellyn-Smith
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  1. Thanks H&Hs.

    Maybe the RBA board memebers will read your post before meeting in a few minutes.

    This must make the lemders to our country very nervous

      • +1

        At some point in the future when spot prices are too high chinese steel makers will want a new pricing mechanism. Basically contracts aren’t worth the paper they are written on with these guys. (but counter parties seemingly have no choice but to suck it up)

        • First you sign the contract, then the negotiations start.
          “At some point in the future when spot prices are too high”…that would be twenty years from now when all the current mines are exhausted.

          I think the all-time peak rate of Chinese construction occurred in the last 12 months. Rural-urban migration has peaked along with jobs growth and the size of the 20-25 year old cohort.
          I expect them to noww immitate Japan and commence a twenty year economic slump followed by a demographic transition to a declining poulation.

          • Andy DragoMEMBER

            “… all-time peak rate of Chinese construction occurred in the last 12 months”

            Ditto! The interesting thing is that even the Chinese themselves agree with this statement. Here’s a link to the latest high-frequency crude output data statement from CIS (via Reuters).
            The quote from there is: “daily average steel output expected to stay below 1.8 mln
            T in months ahead”.
            My guess (based on the shipping statistics from ports) is iron ore prices will pause this week before continuing their march to $80 by December.