Will a global recovery lift iron ore?

Via UBS:

Will the restart of blast furnaces ex-China impact iron ore demand in 2H h/h?
No. Over the last month a number of steel producers have restarted BFs which were hot-idled due to COVID-19. We estimate in total ~22 BFs are being restarted around the world or ~30% of the total idled. In our opinion, this is not a surprise given the time-constraints of hot idling & as demand is picking up. We expect most idled BFs to restart by end-20; this is needed for pig iron production ex-China to be flat h/h in 2H.

Weekly shipments fall with BR struggling to maintain weekly strength
We track daily iron ore shipments from key producers in Australia (AU), Brazil (BR) & South Africa (SA) using UBS Evidence Lab data. Over 7 days to 6-Sept, total shipments are -7% w/w to 24.5Mt with BR falling sharply w/w (-16%) & AU broadly flat. Vale’s weekly shipments fell to ~5Mt, well below the 6.5-7Mt weekly run-rate needed to reach mgmt’s 310-330Mt production guidance for 2020. Vale will provide an update on its plan to lift production to 400Mt at its virtual site visit on 16-Sept. AU producers are again mixed with RIO recovering from last week’s fall (+15% w/w) while BHP fell -10% and FMG -30% due to maintenance. FMG received approval from WA State Govt to lift export capacity to 210Mt from 175Mt (188Mt haematite, 22Mt magnetite); the Iron Bridge project starts up in 2022. SA shipments are near yearly highs (+4% w/w).

Weekly inventory: China port inventory up w/w, vessel inventory drops 1.4Mt
Iron ore inventory at Chinese ports rose 2Mt w/w after having been stable for the previous 5wks; they are now at highest level since Apr-20. Inventory on vessels outside the key iron ore ports in N China (tracked by UBS Evidence Lab) are down -1Mt w/w but remain high at 17Mt (avge since Jan-18 ~6Mt) due to port congestion following changes to customs protocols & poor weather. In China, steel inventory at traders is stable w/w but still above normal levels, while steel inventory at mills is at normal levels.

Outlook: prices to fall over 6mths as Brazilian supply lifts; inventories set to lift
Iron ore is the key driver for RIO, BHP, Vale & FMG and has been robust in 2020; we expect prices to fall back to ~$85/t in 2021 ( note) with Brazilian supply recovering faster than global steel production ( note). We believe tracking iron ore shipments & inventory is critical in determining whether prices are resilient or fall to marginal cost of ~$65/t ( note); see Interactive Model for sensitivities. We have Buys on BHP, Vale & FMG

Roughly right but it is more nuanced than that. Chinese restocking will keep running for another 6-9months. It will add roughly 60mt of apparent iron ore demand while it does. That will sustain prices through H1, 2021 in my view.

The danger comes as that pulse eases and Vale returns the volumes, putting marginal costs back in the frame in H2, 2020.

David Llewellyn-Smith
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