Macquarie explains why volatility in iron ore markets could now be over

Dan Kitwood/Getty Images
  • Iron ore markets have been volatile since the advent of spot trading.
  • However, that’s all changed in 2018. Compared to usual standards, it’s been positively dull.
  • Macquarie Bank believes that’s because seaborne markets are now balanced for the first time in many years.

Since the advent of spot pricing, iron ore prices have been wild, rising sharply before and after the GFC only to slump in recent years.

Not only that, daily movements have been equally crazy within those broader trends, bouncing around by several percentage points on a regular basis.

The advent of futures trading in China has been equally volatile, characterised by wild daily swings as the speculators moved in, deprived of opportunities to invest in other asset markets around the world.

However, that’s all changed this year.

Price movements have been extremely tame compared to what’s been witnessed in the past.

As seen in the chart below showing movements in the benchmark price for 62% fines from Metal Bulletin over the past year, the range over this period had not been all that big, especially since March.

So what gives? Why has the market that resembled a cat on a hot tin roof suddenly become so dull?

According to commodity researchers at Macquarie Bank, the simple answer — amidst a series of undercurrents across specific iron ore grades — is that the market is now fundamentally balanced for the first time in years.

“2018 has been such a dull year for a commodity long-known for reporting big price swings,” Macquarie says.

“Underpinning the flat, dull price trajectory, is a fundamentally balanced market… [with] a modest decline in China’s imports offset by slight growth in the rest of the world.”

On the seaborne supply side, Macquarie says growth from the major iron ore producers is also slowing, while that from lower quality miners is falling, keeping the market balanced.

Macquarie Bank

After a small expected market surplus in next year, Macquarie expects seaborne markets to remain balanced over the longer-term, keeping prices around current levels out to 2022.

“The oligopolistic nature of this market and a relatively steep, top-end of the cost curve — as a result of widening quality differentials — are key reasons,” it says.

“We are positive to neutral towards iron ore in the medium term, still forecasting a relatively high price of $68 a tonne in 2022.

Nearer term, it says iron ore pellet prices are likely to remain elevated given China’s push to improve air quality, especially in Northern regions.

“Another product in high demand is pellet, praised for both its low impurities and superior physical characteristics,” it says.

“We’ve upgraded our pellet premium forecast for next year, after spot prices surged in the Chinese market this quarter.”

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