A little more today for you to understand just how large is the swing underway in the iron ore market. A range of cyclical forces are turning fast and suggest that the downside could remain steep.
Throughout the Q1 blow-off, markets and media under-estimated how important temporary factors were in the price jump. The two most important were the Chinese restocking and weather-created distortions in the Pilbara, both of which are now passing.
Over Q1, Chinese ports added 15mt of iron ore inventory. That is an annualised rate of 60mt. As noted earlier today, that process has likely run its course. If port stocks now destock at the same rate then the reversal in demand from Q1 to Q2 is -120mt annualised of iron ore. That is a lot.
But it gets much worse. The Pilbara has had a disrupted Q1 owing to a wet summer. The shift from Q4’16 shipping rates to Q1’17 shipping rates was -20-25mt quarter on quarter. As the wet season passes it is another annualised swing towards surplus of 80-100mt (only for the quarter). This will be made worse by a Q2 push to catch up on lost volumes by miners and by the EOFY rush we always see.
Then you have to add the 50mt of new production that’s coming on stream and has already begun in Brazil. Then there is new Chinese production.
All up, depending upon the pace at which the variables play out, its a 200-250mt swing in the market balance towards surplus over the next six months. It will then pull back as the temporary factors fade, just in time for underlying demand to slow with Chinese property over H2.
Duck!
