China’s iron ore stockpiles are at record levels and prices will decline to $US50 a tonne by Q4 2017, according to Deutsche Bank (DB).
A team of DB analysts visited China and assessed the current state of the market, including changes in steel production and how that will influence the outlook for iron ore prices.
Although DB said that current market conditions benefited higher grade 62% fines, they noted that inventory levels were still elevated.
The analysts said that port stockpiles were currently at a record 127 million tonnes, of which around 40-50 million tonnes was in lower grade ores.
The analysts forecast that steel demand in China will grow by 3% in 2017, before slowing to 0.5% in 2018.
They said that changes in steel production were currently underway, with the removal of less efficient induction furnaces and cutbacks on blast furnaces.
“The larger steel mills confirmed that China cut 65 million tonnes of blast furnace capacity in 2016, and are on track to close at least 50 million tonnes in 2017,” DB said.
In addition to blast furnaces, the closure of less efficient induction furnaces is scheduled to be complete by the end of June. After the cuts, China’s total blast furnace capacity will fall below 1 billion tonnes.
Although capacity will be reduced, the DB analysts said that the changes will benefit benchmark 62% fines, as the remaining blast furnaces predominantly use higher grade ore.
The resulting preference for higher grade iron ore had forced producers of lower grade 58% fines to offer discounts in the market.
“Market participants have observed the discounts offered by some of the low grade iron ore producers widening to 30-35% relative to higher grade ore,” DB said (see below):
The analysts also inquired about recent price action in iron markets, given the steep run-up in prices commencing in October last year.
“Steel mills explained the run up in the 62% iron ore price in late 2016 was due to the high coking coal price, high steel price and capacity cuts,” DB said.
Despite what looked to be significant speculative activity in the market earlier this year, the DB analysts said that the influence of trading activity had actually been curtailed.
“It appears that traders are having less influence in market – one third of traders were wiped out in 2015, and most are now struggling under the current market dynamics,” DB said.
The analysts said that they expected prices for 62% to decline to $US50 a tonne later this year, before returning to an average price of $US54 a tonne in 2018.
Their top picks in the mining sector are Rio Tinto and Brazilian miner Vale. BHP and Fortescue were both given Hold ratings.