Global supply glut to pull down iron ore prices

Sumit Maitra

Growing iron ore supplies amid signs of steel sector weakness in China and subdued demand recovery elsewhere are likely to keep ore prices under check in coming months.

From a peak of $130.55 a ton for 62 percent ore at the beginning of September, prices came down to $123 at the end of the month when prices saw some temporary spike with the onset of the Chinese Golden Week holiday.

Trigged by decline in iron ore prices, China HRC price corrected by 4 percent during that month.

Rising global production

Brazil’s ore exports, as per official data released by Ministry of Industry, Foreign Trade and Services, have grown 18.5 percent on year in September to 37.86 million tons (mt), the highest monthly data since December 2015.

And over August, shipments were more by 21 percent in line with Vale’s rise in production.

The volume shipped last month is the largest since December 2015, with Brazil exporting a record 39.5 mt, according to the Ministry of Industry, Foreign Trade and Services. Compared with August, there was a 21percent increase in Brazilian iron ore shipments in September.

Its Viga concentration plant in Brazil which was earlier closed due to a court order resulting in a loss of 11,000 tons per day of iron ore production, has reoped on October 4 after Vale reportedly complied with all the due legal requirements for the permits issuance.

It’s not just Brazil, other major iron ore exporters like Australia and South Africa are also raising their shipments.

China glut

Iron ore supplies from Brazil have been normalizing, and port inventories in China have been rising, which does not bode well for iron ore prices, says a research report of Motilal Oswal.

By the end of September, the slowing down of Chinese steel sector was perceptible with falling blast furnace utilization and softening of iron ore prices.

“China’s demand for iron ore is expected to be lower than today in the second half of the 2020s as crude steel production plateaus and the scrap-to-steel ratio rises. At the same time, the likelihood of new supply of iron ore from West Africa has increased. This implies that it will be even more important to create competitive advantage and to grow value through driving exceptional operational performance,” BHP said.

Short term price jump

In the last week of September, International prices rose to $123 per ton from $117 per ton in the previous week as steel makers restocked before the holiday week coupled with rise in futures prices, decrease in steel inventories and improving manufacturing purchasing managers’ index (PMI) in China.

Announced by Vale of the suspension of operations at a concentrated plant in Brazil also played it’s part though according to latest reports, the plant has restarted operations.

Outlook

In addition to the iron ore availability and price risk as well and the timeliness of governments infrastructure spending, the movement in international prices and import pressure from Free Trade Agreement countries would be the key factors.

The world crude steel output rose 3 percent on month in July, signaling a potential recovery in global demand conditions with China leading, although it was down 2.5 percent on year. This has contributed towards increased global steel prices.

While domestic steel players have capitalised on this by increasing exports to China (especially of intermediate and flat products), the domestic demand has been muted during 1QFY21. However, India’s steel exports are likely to reduce, as volumes are reallocated to the more profitable domestic market and Chinese production ramps up.