Demand for steel, soaring prices
An increase in steel consumption as the world emerges from the pandemic-induced crisis is expected to drive iron ore to an all-time high as larger miners struggle to keep pace with demand.
Benchmark prices are expected to hit $ 200 per tonne – surpassing the record high of $ 194 set more than a decade ago – as Chinese steelmakers ramp up production in defiance of government attempts to limit production. production to control the industry’s carbon emissions. This is tightening an iron ore market that had not fully recovered from a supply shock more than two years ago.
“Iron ore prices could rise in the short term and surpassing $ 200 a tonne is certainly possible,” said Kim Christie, senior analyst at Wood Mackenzie.
It would only take additional supply issues or additional strength in Chinese steel production for prices to get there, she said. At the heart of the 14% surge in spot iron ore last month, helping to stimulate the recovery of supercharged raw materials, is rising steel prices from Asia to North America.
Particular emphasis was placed on China, where the economy has exploded, and a series of measures to clean up the world’s largest steel industry have pushed steel mill profitability to its highest level for more than a decade.
“These high margins are driving factories to build inventories and charge more for high-grade ore to increase productivity,” said Erik Hedborg, senior analyst at CRU Group. “We’ve seen a bit of ‘additional demand for iron ore’ in an effort to increase inventories.”
Iron ore futures on the Singapore Stock Exchange rose 0.4% to $ 186.50 a tonne mid-week amid slowing trade as China was closed for a holiday.
Factories typically switch to materials with higher iron content during times of steel production restrictions to reduce emissions. Morgan Stanley called China’s supply reforms a possible “game changer” for demand for higher-grade ore, with grade deviations unlikely to normalize any time soon.
Citigroup expects benchmark prices to hit $ 200 within a few weeks. There will be a shortfall of 18 million tonnes in the first three quarters of 2021 amid improving global demand for steel and a slight shortfall in shipments from major miners. The bank had previously predicted a surplus of 1 million tonnes.
BHP Group and Rio Tinto Group said last month that quarterly shipments fell due to weather disruptions in Australia, although both maintained their guidance for the full year. Vale SA produced less ore than expected, highlighting its difficulties in increasing volumes after the tailings dam disaster in early 2019.
China is on track to produce more than one billion tonnes of steel for the second year in a row, despite production cuts in several provinces. Recent government changes to export tax rebates are also unlikely to be enough to deter production, Christie said.
“If China wants to slow steel production, it must temper domestic demand,” which is heavily leveraged for construction, she said. “We expect to see further government action aimed at cooling demand for steel, especially in the housing sector, and this will likely be the catalyst for a correction in iron ore prices.”
More broadly, Chinese authorities have signaled plans to tighten controls on commodity markets. The China Iron and Steel Association said steelmakers face operational pressures due to high input costs.
Analysts expect iron ore to slow during the year, citing factors such as China’s steel production measures and accelerating growth in iron ore supply .
Yet some market watchers have estimates for the second half of the year of over $ 100 per tonne. Citigroup has forecast a decline to this level only in its most bearish scenario, while WoodMac says prices will not drop below this threshold for 12 months.
“We are also seeing the fundamentals soften with the increase in Brazilian supply during the year,” said Dim Ariyasinghe, research analyst at UBS Group. “Ultimately, while there is underlying steel demand and margins are positive, we expect to see continued strength in the price of iron ore.”