Supply disruptions may see an 'aggressive fall' in Chinese iron ore inventories

Jie Zhao/Corbis via Getty ImagesIron ore in China.
  • Iron ore prices surged to fresh multi-year highs on Wednesday.
  • The Commonwealth Bank believes the benchmark iron ore price will remain above $90 a tonne in the near-term due to supply disruptions in Brazil and Australia.
  • It expects an “aggressive fall” in Chinese iron ore port stocks over the coming weeks as supply disruptions begin to bite.

Iron ore prices have been on a tear in recent months, surging to fresh multi-year highs on Wednesday.

Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank, suggests those gains are likely to be sustained or built upon in the near-term as concerns over supply disruptions in Brazil and Australia — major seaborne iron ore exporters — begin to be reflected in reality.

“We expect iron ore prices to remain above $90 a tonne in the near term as physical markets finally price in the significant disruptions in iron ore markets,” Dhar said in a note released on Thursday.

Following a deadly mining disaster at an iron ore facility operated by Brazilian miner Vale in late January, resulting in disruptions to activity at other mines owned by the group due to safety concerns, along with damaged caused by Cyclone Veronica to iron ore facilities on Australia’s Pilbara coastline late last month, Dhar says changes in Chinese iron ore port inventories will soon play a key role in determining what will happen to prices next.

“China’s port stocks are an important indicator of surplus and deficit concerns in iron ore markets,” he said. “That is mostly due to China’s enormous influence on seaborne markets, where they account for around 70% of the world’s seaborne imports.”

With seaborne supply now temporarily constrained, and with Chinese policymakers rolling out an additional 800 billion yuan in infrastructure projects this year — a factor that points to robust steel demand ahead — Dhar expects an “aggressive fall” in Chinese iron ore port inventories in the coming weeks.

CBA

“China’s iron ore port stocks have increased since February, but last week marked the first decrease in China’s iron ore port stockpiles in nearly two months,” he said.

“With Vale’s production losses only now being felt by the seaborne market, we think an aggressive fall in port stocks over the coming weeks is on the cards. Tropical Cyclone Veronica’s impact on Australian iron ore exports will only exacerbate downside pressure on China’s port stocks.”

While prices for all major iron ore grades currently sit at multi-year highs, lower grades, in particular, have soared since late November, lifting by over 90%, more than double the move seen in the price for benchmark 62% fines over the same period.

Lower grades were shunned by Chinese steel mills over the past couple of years, partially in response to tougher environmental restrictions in Northern China that saw mills favour more costly and greater yielding higher grades.

However, with iron ore prices shooting higher, adding to margin pressures at steel producers, Dhar believes that could see mills turn to port inventories, much of which are lower quality ore.

“Low-grade iron ore markets will likely be the key market to watch as the disruption to Vale’s production unfolds,”he said.

“Port stocks would be the first preference for steel mills over seaborne markets as port stocks tend to trade at a discount to seaborne imports for the same iron ore specifications.”

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