The ferrous complex was roughly stable Friday July 2, 2021 as spot eased, paper firmed and steel fell:
June may have been a boom month for Brazil but it was a bust for Australia as RIO falls well behind its target run rate. Westpac:
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- If May iron ore export volumes fell short of our expectations, then June exports really disappointed. After just 76mt in May, exports in June fell to 73.2mt according to our shipping activity models. That’s -10%yy and -6%3myy. Given recent price gains and the weather-based drag on exports in Q1, we had expected to see a stronger rebound in Q2. That clearly was not the case.
- While Port Hedland iron ore exports have been slightly softer year to date (-3%) and over the last quarter (-3%3myy), the real weakness has been at Port Dampier & Cape Lambert where volumes for the year to date are running at -15%. Exports from Port Dampier hit a 16m low in June!
- Rio did note in its Q1 production release that “labour resource availability and weather challenges disrupted maintenance in the mine processing facilities”. There have been press reports noting “Fire-prone Rio Tinto port shut for maintenance” suggesting that there are specific issues at work. Rio will update its quarterly production report on July 16 which may give guidance on how quickly exports will return to a more normal situation.
- The combination of a weak volumes and enormous price rises will still likely lift the value of June iron ore exports to a fresh record high. After the A$16.59bn record for May (just below our $16.7bn forecast), we expect to see the value of exports rise to A$17bn in June.
Meanwhile, China is ramping its own output:
China’s iron ore imports are likely to fall by around 79 million mt/year from 2020 over the next five years, in line with the aims of the country’s five-year plan for the steel industry, Jinshan Xie, an analyst with Shanghai-based research firm Horizon Insights, said during a webinar organized by Horizon and the Singapore Exchange SGX June 30.
Imports will fall as China develops its own iron ore mines, which, together with local scrap production and pig iron, could eventually meet more than 45% of the country’s total iron demand in 2025, compared to 37% in 2020, Xie said. However, the country’s iron ore import levels will still remain above 1 billion mt/year, she said.
…Fifty iron ore mine projects in China are reported to be currently under construction, planned or expanding, with a total capacity of around 340 million mt/year, which could increase the country’s iron ore concentrates production by 105 million mt/year. The country is seen as having the potential to supply 22% of its domestic iron ore demand in 2025, up from 19% in 2020.
The surge in the iron ore price over the past year is seen to have made Chinese iron ore reserves — which are typically low-grade — more profitable to mine.
I have none of these tonnages in my outlook. If they come then that’s materially more downside for seaborne prices.
Moreover, to be sustained, that Chinese domestic output will need ongoing high prices. It’s probably all uneconomic under $120, as we saw in 2015.
The example of how to do that is already underway in the coal market. Ban volumes from Australia to create a two-tiered pricing system with low seaborne prices and high domestic prices.
Not ideal for profits or efficiency but great if you no longer want to rely on foreign enemies.