The ferrous complex is fucked. No other word for it. Despite Dalian being closed, the spot ore price was smashed again with Singapore futures:
We appear to be on a one-way ticket to $60 and an overshoot has to become a serious possibility as well.
I also think that ludicrous coking coal prices are next. And global steel prices as well.
In fact, it is now my base case that China is going to crash the entire commodities complex before it relents on its property reform program.
Then, for the future, try this on for size, via UBS:
#1 Iron ore supply growth to lift in 2022/23
We estimate global iron ore shipments lifted 2% in 2020 and are up +2% YTD in 2021 using UBS Evidence Lab data; we estimate Brazil shipments are up +10% YTD (Vale +7%) while Australia is -1% (RIO -4% vs BHP -4%, FMG +2%). As detailed in our note, company guidance for CY21 points to iron ore supply lifting +60Mt h/h driven mainly by Vale and Rio Tinto. Based on shipments in July & August, we see a risk that both companies could fall 5-10Mt short of the mid point of their guidance (both at 325Mt).
#2 Guinea to potentially add >200Mt by end of decade
SMB-Winning is developing the 650km trans-Guinean rail line and a 60Mtpa mine at Simandou Blocks 1&2 in Guinea with the financial support of the Chinese govt (note). RIO is still to decide whether to join the consortium or hand over Blocks 3&4 to the Chinese. In our opinion, there is a high likelihood now that Simandou will be developed and Guinea will become a major exporter of iron ore (200Mt+) by the end of the decade, with the recent coup unlikely to disrupt progress materially. The economics of the project are compelling from a China govt perspective with there being a 3-4yr payback if Guinea fragments the iron ore industry, pushes it into structural oversupply, and this in turn drives the long-term iron ore price down US$5/t (as China imports 1bt pa of iron ore). The draft of the 14th 5-Year Plan for the Steel Industry also supports the investment by Chinese SOEs in iron ore projects outside of China to improve the country’s self-sufficiency (note).
#3 Scrap steel to displace iron ore
As detailed in our note, scrap steel is a direct substitute for iron ore and can be processed in either a blast furnace-basic oxygen furnace (BF-BOF) or an EAF. One tonne of scrap steel displaces around 1.6 tonnes of iron ore (assuming the Fe content of the scrap is 100% versus around 62% for iron ore). We assume scrap steel consumption increases by ~75Mt in 2020-25 and by ~200Mt in 2020-25; this is set to displace ~120Mt of iron ore in 2020-25 or ~25Mt pa. The draft 14th 5-Year Plan for the steel industry was published at the end of 2020 (note) and proposes a target of 300Mt of steel scrap to be collected consumed by 2025. We believe this target is achievable given the increasing amount of steel scrap becoming available (with buildings/ cars etc built in the early 2000s now being recycled) and given this is a key focus of the central govt.
That’s roughly half a billion tonnes of iron ore displacement by 2030.
You do the math.