Daily iron ore price update (price taker)

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Here are the iron ore charts for May 8, 2014:

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Trouble. Paper markets are in free fall. The 12 month swap has broken both its low for the year, the move and $100. Dalian 6 month futures are chasing it lower. Rebar futures fell sharply to record lows.

Physical is following. Spot hit its low for the year and the move. Rebar average is fading fast. The Baltic Dy capesize component fell 4% as well.

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Reuters has texture:

“We have found it difficult to sell this week, and there are even no inquiries right now,” said an iron ore trader in
Beijing.

“Steel mills are pushing to lower buying prices but we can’t sell too low, and we think prices will hold above $103 a tonne.”

…”Some mills are making a profit of 80-200 yuan a tonne if they buy stockpiles from ports, but their shortage of cash remains a big problem,” said a second trader in Beijing.

“No inquiries”, $103 is not going to hold. This smells like another destock and producers will have to take it. There is room for downside. Here are a couple of Morgan Stanley charts showing why. Iron ore days of cover was still above 30 recently:

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It could sink all the way to 20 days if mills want to push it. Why not, there’s a supply glut. This risk is exacerbated by the huge port pile:

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As Mac Bank recently pointed out, mills are holding ore at ports too so the days of cover is actually higher than it appears. If mills want to do it the dynamics are there to push prices to $80. Given their fading prospects for the second half as property hits the skids they might do it now instead of Q3.

A bit of game theory suggests not. The key to controlling the iron ore price now is the Chinese inventory pile. It is that that allows steel mills to wait out the Pilbara oligopoly, which pauses shipments when prices fall, but it can only pause for so long as pressure builds to hit production targets.

Steel production is still high so my guess is prices could fall to $95 or so on this move. But that also raises the risk that speculators will be forced to dump stock and introduce price gapping so all bets are off (except in the equity market which strangely bid up miners yesterday).

Welcome back to the hundreds of year old truth of commodity prices that Australia forgot. Producers are price takers not price makers.

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.