The
staggering recovery of global steel demand last year has driven the market for
its main ingredient, iron ore, soaring in recent months, and helped S&P
Global Platts 62%-Fe IODEX CFR China reach an all-time high of $193.85/dmt on
April 27.
The red
dirt has seen its price more than double over the past 12 months from
$83.40/dmt on April 27, 2020. And as the world turns to infrastructure to
stimulate its post COVID-19 recovery, and as other industrial metals show
comparable rises, it could indeed be reasonable to ask how much further this
rally could go.
What we
are witnessing is the continuation of a demand-driven trend that began exactly
a year ago, when China saw a fast rebound in economic activity following its
rapid exit from lockdown, which was immediately matched by a sudden spike in
steel prices.
China
produces over 55% of the world's steel and buys over half its seaborne iron
ore. The recovery was underpinned by China's 2020 stimulus package which
contained Yuan 4 trillion ($153.8 billion) of relief for industry, on top of
Yuan 2 trillion in fiscal spending, targeted at the infrastructure sector.
For a
few months, China's strength was offset by weaker steel demand in other
countries still grappling with the virus. But in the summer, global steel
demand began rallying too, adding to China's already considerable appetite for
iron ore.
Germany
turned the corner in July and the US in August. They never looked back. Since
summer 2020, global steel markets have been experiencing an unprecedented
rally—in just nine months, hot-rolled coil prices in the US have more than
tripled, while they have more than doubled in Germany and Brazil.
The
current steel price trajectory suggests there is more room for immediate upside,
and observers feel this trend could be sustained for some time, supported by
infrastructure-heavy global stimulus plans. The largest by far will of course
be US President Joe Biden's $2 trillion "once in a generation"
infrastructure plan, which, even though it's been noted to include a large
chunk of spending on items not traditionally regarded as infrastructure, would
involve fixing 30,000 km of roads and 10,000 bridges.
At the
same time, Chinese fundamentals show few signs of tapering off. The country
produced 271 million mt of steel in Q1 2021, flat from Q4 2020. Steel
inventories have kept dropping, reflecting strong demand both locally and for
export, while profit margins at mills are at elevated levels of $135-$175/mt.
There
is, however, growing nervousness about the Chinese government's stated aim of
cooling an overheated property market via a gradual tightening of credit
supply, and Premier Li Keqiang has also recently made note of rising raw
material prices as a concern, though without signaling any clear policy
actions.
The
resilience of iron ore prices has been compounded by tight supply, particularly
in the last three months, as both Brazil and Australia experienced seasonal
production reductions. Australian miners Rio Tinto and BHP saw a decline in
production by 11% and 5% quarter over quarter respectively, while the largest
miner in Brazil, Vale, saw its ore production drop by 20%. These constraints
are expected to ease in Q2, however.
While
the market as a whole is clearly buoyant, certain pockets of the iron ore
market have shown particular strength. These include high-grade iron ore fines
produced by Vale, as well as "direct feed" products such as lump and
pellets. These have been supported by Chinese government policies aimed at
curbing its resurgent pollution problem observed in recent months, in what may
be a start to its long march toward carbon neutrality.
These
are extraordinary times for steel, and it seems likely that iron ore will
continue to move in the orbit of its larger, downstream cousin. Chinese trends
Sourcce:
SPglobal