Iron ore has started 2021 in much the same fashion as it spent most of last year, moving higher and adding to a rally that saw the spot price surge 75% in 2020.
But while the steel-making ingredient is continuing its stellar run, the fundamentals may slowly be starting to turn against further gains, with easing prices seeming more likely.
The main reasons to be cautious over the spot iron ore price are rising supply from top exporters Australia, Brazil and South Africa, and early signs that Chinese steel output is likely to stabilise this year.
The spot price of benchmark 62% iron ore delivered to north China MT-IO-QIN62=ARG, as assessed by commodity price reporting agency Argus, ended at $172.30 a tonne on Jan. 15, up 7.8% from the end of last year and close to the all-time high of $175.40, reached on Dec. 21.
Iron ore is one of the commodities that shrugged off the impact of the coronavirus pandemic quickly, as it became apparent that China, which buys about two-thirds of global seaborne volumes, was spending massively to stimulate its economy.
At the same time Beijing opened the stimulus taps, there were supply concerns, particularly in number two exporter Brazil, and third-ranked South Africa, as mines and transport systems were hit by measures to try to contain the coronavirus outbreak.
But there are now signs that supply has largely recovered, with vessel-tracking and port data compiled by Refinitiv showing robust shipments from the top exporters in December.
Australian exports were about 79.75 million tonnes in December, the most since June’s 82.8 million and the second-strongest month for 2020.
Brazil shipped out about 33.83 million tonnes in December, the most since September and well above the range of 20.8 million to 24.8 million that prevailed from January to May last year.
South Africa’s exports were 5.34 million tonnes in December, the highest in 11 months and well above the 4.55 million in November and the 3.33 million in October.
SUPPLY RECOVERS, DEMAND HOLDS UP
All three major exporters have shown a rising trend in recent months, which perhaps isn’t a surprise given the demand pull from China, the high prices and the recovery in mining operations in Brazil and South Africa.
If supply is increasing, the key for the spot price becomes what is happening to demand in China.
There is no doubt that 2020 was a stellar year, with China producing a record 1.05 billion tonnes of steel, the first time the 1 billion mark has been exceeded.
Will the performance be repeated in 2021? That largely depends on who you are talking to, with government consultancy China Metallurgical Industry Planning and Research Institute (MPI) forecasting a 1.4% rise this year to about 1.065 billion tonnes of steel output.
However, Industry and Information Technology Minister Xiao Yaqing called on the steel industry to “resolutely” reduce output and ensure there is a year-on-year decline in 2021, according to a Dec. 29 report from the state-controlled news agency Xinhua.
Xiao’s comments appear related to government targets to control steel-making capacity and limit both the energy consumed and the pollution produced by the industry.
If there is to be a conflict between economic growth goals and energy consumption and pollution, it’s more likely Beijing will prioritise growth.
Nonetheless, even if economic stimulus continues in the steel-intensive construction sector, it’s difficult to see steel demand rising as much in 2021 as it did in 2020.
China’s steel demand is likely to rise moderately this year, and probably not by more than supply of iron ore can keep up with.
The Singapore Exchange iron ore forward curve is pointing to a gradual easing of the spot price, but it’s worth noting that every contract out to July is still above $150 a tonne, suggesting that the market believes China’s demand will be strong enough to keep supply relatively tight.
Another factor worth noting is that China’s iron ore imports have dropped for three consecutive months, with December’s 96.74 million tonnes being the lowest since May.
While the decline in imports may have been because of insufficient supply, the recovery in supply should lead to some of the froth coming out of the spot price.