Price volatility will continue to mark the iron ore trade


Indian iron ore producers take their cue from world market prices and therefore steelmakers here remain prepared to accept price fluctuations.

Kunal Bose

How the prices of the world’s second largest sea-traded commodity, iron ore, have performed over the past year will make all concerned beware of the demand and price forecasts for the product in 2022 by global research agencies. Indian iron ore producers take their cue from world market prices and therefore steelmakers here remain prepared to accept price fluctuations.

Much to the surprise of miners and trade officials, iron ore prices in 2020 fell from an all-time high of $ 235.55 per tonne on May 12 to a 16-month low of around $ 85 in November and finally to end the year on the Dalian commodity exchange in China at $ 106.71 for delivery in May. Such a roller coaster ride of the steel ingredient was fueled in the first place by the expectation of a strong recovery in demand in steel, mainly on the construction of infrastructure in the second post-global wave of Covid- 19, then a few months later by the edict of Beijing that the steel industry must reduce emissions resulting in production control. In the end, the raw material lost almost 30% compared to the opening price of January 2021.

Indian miners are keeping a close watch on all developments related to iron ore imports and the more recent steel production discipline in China, which buys more than 80% of its ore requirements from abroad, mainly from China. Australia and Brazil, to get a fair idea of ​​price trends. Globally, some 1.5 billion tonnes (bt) of ore is shipped to importing countries, but mainly to China by sea.

So it’s no wonder that monthly Chinese imports and port stocks there at any time will generally have an impact on iron ore prices. For example, ore prices started to decline in the second half of last year, coinciding with a drop in Chinese imports of 9.6% between June and November compared to the same period in 2019. Prices in Dalian have fallen. dropped by 42% in those six months.

The fact that India is more or less following the global trend is confirmed by the periodic review of ore prices by local industry leader NMDC, whose annual production of around 36 million tonnes (mt) makes it the largest miner in the country. As world prices fell, the NMDC lowered its prices several times. As of December 28, the NMDC price for lump ore with an iron (fe) content of 65.5% was 4,900 a tonne and that for 64% fe fines was4,060, excluding direct debits. While such a drop in prices helps steelmakers offset the high cost of coking coal to some extent, some complain that locally mined iron ore still exceeds world prices.

As the new year has begun, one thing is certain, price volatility will continue to mark the iron ore trade. And a single factor influencing prices will be the production and use behavior of Chinese steel, especially in the construction and real estate sectors.

According to the World Steel Association (WSA), China’s steel production fell 22% year-on-year to 69.3 million tonnes in November, and cumulative production from January to November fell by 2 , 6% to 946.4 million tonnes. The WSA will release the December production figure in the third week of this month. Regardless, China’s steel production in 2021 would be lower than the record 1.065 bt in 2020. In addition, the harsh winter and the stress to keep the environment clean to host the Olympic Games in winter in February will limit steel production in the first quarter of this year. Beyond what is happening with steel production through March, Beijing has notified its commitment to continue tackling emissions from its massive metals and minerals industries.

Anticipating a further 50 million tonne squeeze in Chinese steel production in the current year, a CITIC Futures analyst expects a “large and gradual decline” in demand for ore from iron is further compounded by a “rather weak” real estate market, possibly a drop in demand for metals and steelmakers on their journey to environmentally responsible mining using increasing volumes of scrap as a substitute for ore.

US rating agency Fitch says the real estate industry, a heavy user of steel, is in a worsening debt crisis and is blatantly manifesting itself in the case of Evergrande, the most indebted developer in the world. Fitch says that in a dismal scenario, China’s residential home sales revenue could fall by 30% this year and a third of valued developers in the country could face negative cash flow. The combination of all these negative factors is likely to affect the volume of China’s iron ore imports in 2022 and hence the prices of minerals.

Incidentally, the country which accounts for more than half of the world’s steel production imported 1.17 bt of ore in 2020 and in the first 11 months of 2021 imports amounted to 1.04 bt. All of these pessimistic forecasts will need to be tempered in the event that Beijing re-introduces fiscal stimulus to help revive the real estate sector. Wasn’t China the first of the economies battered by the Covid-19 to leave the bloc to find the path to recovery thanks to an easing of monetary policy and sectoral stimulus measures? The country, as on many occasions in the past, can once again surprise by emerging from the economic gloom. The Macquarie Group says current Chinese steel production is “unsustainably low” and that it will not rule out a rise in iron ore prices at some point in the first half of the year. Are we then going to see a resumption of steel production in China after the winter? Amidst all the variables, including the likely impact on the economy of the third wave of Covid, we have an average iron ore price forecast for 2022 ranging from a low of $ 70 to almost $ 100. . At the expected rates, large mining groups such as BHP Billiton, Vale and Rio Tinto will still earn a lot of money since their production cost per tonne is around $ 15.

(Former FT correspondent, author is now India correspondent for Euro Money Metal Market
Magazine)

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