Iron ore futures have been – and remain – an enigma in the commodity markets since the start of the COVID-19 pandemic. The widow-maker is the title of one article on Bloomberg and this is hard to argue; the rhetoric has been about the correction that is coming, not the bull market we have been seeing.
Dry bulk freight rates have been pushing hard with the Capesize index moving above USD 30k as Vale upped output, taking the tonne miles out of the market. Meanwhile Western Australia has been smashing output records to meet Chinese demand for the iron ore.
Seasonality lends towards the bear view; yes the trend is bullish but the expectation has been for the market to cool off as the construction season winds down. Port inventories have been on the rise since the 12—06—20 with output ahead of consumption. The stars have aligned, yet the raw material keeps rising.
Fundamentals are part of the story, as is technical analysis. Elliott wave analysis had been signalling wave completion for the last few weeks, supporting the daily bearish rhetoric in the media. But the big picture is a little bit bigger.
For the mill owner two things matter: output and profit. The mill will run at a loss and build a stockpile whilst it waits for higher prices. However, capacity utilisation rates are high and steel margins have risen from RMB – 81 to RMB 211 since the March 31. For the mill owner, rising steel margins that are above zero means they are not going to reduce consumption. Iron ore might be above USD 100 but the reality is nobody on the production side cares about stockpiles, tonnage at sea, excavation rates, imports or exports. If the margin is there they will keep purchasing ore.
The technical is not going to draw a top to the price, nor are port inventory levels. Lower steel prices, rising coke, oil and nickel prices is what will draw this bull rally to an end. Until we see a dynamic change along the Virtual Steel Mill, the margin will remain bullish – and with it the price of ore.