Iron ore is on an extraordinary rally this
month as growing optimism about China stimulus fuels a market
already concerned about one of its biggest suppliers.
The futures contract in China has surged more than 16% in
May alone as stronger-than-expected demand combined with
Brazil’s emergence as the world’s new coronavirus hotspot,
spurring concerns that mining and export operations in the
second-biggest iron ore shipper could be affected if
restrictions are implemented.
“The demand in China is very strong right now and there is
plenty of optimism ahead of the ‘Two Sessions’ later this week,”
said CRU Group senior analyst Erik Hedborg, referring to the
National People’s Congress that starts on Friday. Low
inventories at ports and mills also mean that China’s steel
mills are currently willing to pay a premium for the steelmaking
material.
“This is a real concern to Chinese steelmakers as they
don’t have a lot of wiggle room and they are willing to pay a
premium to secure supply,” said Hedborg. “Especially now that
the supply chain is constrained and there are all kinds of news
out there about supply restrictions in South Africa and a rapid
outbreak in northern Brazil where Vale’s Northern System is
located.”
Vale SA has already cut its guidance due to the virus and
bad weather. At the same time, there are expectations that China
will announce stimulus measures at the NPC, said Hedborg
Still, iron ore’s surge may only be a temporary spike. A
run to three-digits, which was last seen in August, won’t be
sustained, according to Wood Mackenzie Ltd. principal analyst
for global iron ore and steel costs Rohan Kendall.
“If there are Covid-19 restrictions that further impact
Brazilian iron ore exports then prices will get to $100,” he
said. “But it will be short lived.”China is unlikely to sustain
robust growth in steel output, and iron ore supply is set to
increase as Brazil recovers and domestic iron ore production
rises. Domestic mine utilization rates are at a two-year high as
producers are encouraged by strong prices, he said. WoodMac
forecasts prices will retreat to $70 a ton in the second half of
this year.
Iron ore futures on the Dalian Commodity Exchange were 0.2%
lower at 709.5 yuan a ton at 12:15 p.m. local time, after
closing 2.8% higher on Tuesday. The contract in Singapore was
1.1% lower at $94.45 a ton, paring its 17% gain this month.
Benchmark spot ore was last at $97.55 a ton, the highest since
September, according to Mysteel Global. Prices were near $84
just two weeks ago.
(Bloomberg)