China Iron Ore Prices Leap: Supply Worries?

China Iron Ore Prices Leap: Supply Worries?

China Iron Ore Prices Leap

Supply Worries?

After the fatal dam failure in January this year, the trust crisis of the global iron ore giant Vale dam structure has been intensified. Vale said in early April that it had suspended the operation of 10 mines in Minas Gerais in southeastern Brazil due to the failure to obtain stability certification for these mine structures. The company’s external inspectors also refused to issue safety certificates for the other eight mines in the evacuated areas of Vale, which are considered to be at risk.

Since the dam break, the iron ore price on the Singapore Exchange has soared 37%. As the largest supplier of iron ore, Vale’s production capacity fell by 93 million tons after the disaster. According to the Vale, it would take around two to three years to achieve its previous 400 million tons production target. According to the official Brazilian trade data, Brazil’s iron ore shipments in April were 18.34 million tons, which is a 29% decrease from the corresponding period of last year. Ship tracking and port data compiled by Refinitiv, show that Brazilian iron ore exports in the first four months of 2019 were 97.2 million tons, down from 111.9 million tons in the same period of 2018. It is difficult for Vale’s competitors to fill this supply gap.  

At the same time, Australian mining giant BHP Billiton estimated that the tropical cyclone in early April has reduced the company’s iron ore production by 6 to 8 million tons. Data show that Australian iron ore exports in the first four months of 2019 were 259 million tons, down from 280 million tons in the same period last year.

The total shipment of these two major iron ore exporters, Brazil and Australia, fell by 3,570 tons in the first four months of 2019. Iron ore supply and demand structure changes with the global iron ore supply tension, which led to a continued increase in iron ore prices.  Goldman Sachs raised its average iron ore price target for 2019 from $81 per ton to $91 per ton.

Impact on China

China is one of the largest steel producers in the world. Its demand for iron ore is enormous. The output and quality of China’s domestic iron ore cannot meet with its steel production demand. Therefore, it needs a large amount of imported iron ore from the international market. Based on the data released by China’s General Administration of Customs, it has imported about 1.06 billion tons of iron ore in 2018.

China’s iron ore price rose significantly on Monday, hitting a five-year high, along with the steelmaking raw materials rose, supply was constraints as the country’s port inventory reduce further, whereas demand may increase again. As of last week, China’s port iron ore stocks reached 121.6 million tons, which is the lowest level since the beginning of 2017. Inventories have steadily declined from the 2019 first half year highest point (around 150 million tons) in the past four weeks.

Although China’s iron ore imports recovered in May from the April 18-month-low, the shipments of last month were still significantly lower than last year due to the output disruptions in Brazil and Australia.

According to the China General Administration of Customs, as the world’s largest iron ore consumer, China has brought 83.75 million tons of iron ore last month, which is an increase of 3.7% from April, but 11% lower than May 2018. Moreover, China has imported 423.92 million tons of iron ore in the first five months of this year, down 5.2% from the same period in 2018. The most active iron ore contract on the Dalian Commodity Exchange rose 3.2% to close at 729.5 yuan ($105.24) per tonne, away from the three-week low hit on Thursday, before the Chinese market closed for the long weekend.

According to data from Singapore-based steel and iron ore data analysis company Tivlon Technologies, iron ore demand will pick up again in the next few weeks as the supply shortage.

Tivlon’s data scientist Darren Toh claim that Tivlon’s analysis “emphasized a further rise in ferroalloys” and added that China’s infrastructure projects will continue to support the demand for iron ore. He also said that by August, the spot price of iron ore may reach $120 per ton. Other steelmaking components were stronger as well, coking coal rose 2.8% to 1,415 yuan per ton, while coke rose 0.7% to 2126.5 yuan.

Considering the high profit generated by high iron ore prices, it is less likely for Brazil and Australia to consider increasing the supply in the short term. According to Argus Media, the 62% iron ore benchmark price delivered to China closed at $94.05 per tonne on Monday, up 29% from the end of last year. However, if Brazil and Australia continue to maintain such a small supply of iron ore, it is possible that the big buyers will have to find new suppliers.

By Louis Cai

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